UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported) November 18, 2004
-------------------
Franklin Street Properties Corp.
(formerly known as Franklin Street Partners Limited Partnership)
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(Exact Name of Registrant as Specified in Its Charter)
Maryland
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(State or Other Jurisdiction of Incorporation)
000-32615 04-3578653
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(Commission File Number) (IRS Employer Identification No.)
401 Edgewater Place, Suite 200, Wakefield, MA 01880-6210
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(Address of Principal Executive Offices) (Zip Code)
(781) 557-1300
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(Registrant's Telephone Number, Including Area Code)
Not Applicable
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(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Item 2.02 Results of Operations and Financial Condition
On August 13, 2004, Franklin Street Properties Corp. ("FSP Corp."), a
Maryland corporation, four wholly-owned acquisition subsidiaries of FSP Corp.,
each a Delaware corporation (the "Acquisition Subs"), and four real estate
investment trusts, each a Delaware corporation (the "Target REITs"), entered
into an Agreement and Plan of Merger (the "Merger Agreement"), providing for (i)
FSP Corp.'s acquisition of each of the Target REITs by merging each Target REIT
into a related Acquisition Sub, resulting in the Acquisition Sub being the
surviving corporation and (ii) the issuance of approximately 10,894,994 shares
of FSP Corp. Common Stock as consideration in connection with the mergers. Upon
consummation of the mergers, the holders of the preferred stock of the preferred
stock of the Target REITs will become stockholders of FSP Corp.
Pursuant to the requirements of Regulation S-X, this Current Report on
Form 8-K includes a Statement of Revenues over Certain Operating Expenses for
FSP Addison Circle Corp., FSP Collins Crossing Corp., FSP Montague Business
Center Corp., and FSP Royal Ridge Corp. for the nine months ended September 30,
2004 (unaudited) and for the thee years year ended December 31, 2003, as well as
pro forma financial information for FSP Corp. and an acquisition completed by us
in June 2003. Because changes will likely occur in occupancy, rents and expenses
experienced by the Target REITs and because the merger may not be completed, the
historical financial statements and pro forma financial data presented should
not be considered as a projection of future results.
In connection with the mergers, the Registrant is hereby filing as
exhibits to this Current Report on Form 8-K the financial statements and pro
forma financial statements set forth below under Item 9.01.
Upon consummation of the mergers, the Registrant expects to file a Current
Report under Item 2.01 of Form 8-K, "Completion of Acquisition or Disposition of
Assets," reporting the information required to be set forth therein.
FORWARD LOOKING STATEMENTS
THIS FORM 8-K CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND THE FEDERAL SECURITIES
LAWS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON FSP CORP.'S CURRENT
BELIEFS AND EXPECTATIONS, BUT THEY ARE NOT GUARANTEED. FOR EXAMPLE, THE REVENUE
IN EXCESS OF OPERATING EXPENSES MAY BE LESS THAN CURRENTLY EXPECTED DUE TO
CHANGING MARKET CONDITIONS, INCREASED EXPENSES OR FOR OTHER REASONS. ALSO,
VARIOUS CLOSING CONDITIONS UNDER THE MERGER AGREEMENTS MAY NOT BE SATISFIED AND
THE ACQUISITION MAY NOT BE COMPLETED. INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE UPON FORWARD LOOKING STATEMENTS.
Item 9.01 Financial Statements and Exhibits.
(a) Financial Statements
Addison Circle
Index to financial statements as of September 30, 2004
(unaudited) F-2
Index to financial statements as of December 31, 2003 F-8
Index to statements of revenue over certain operating
expenses for the period January 1, 2002 to September 29, 2002
and for the year ended December 31, 2001 F-24
Collins Crossing
Index to financial statements as of September 30, 2004
(unaudited) F-29
Index to financial statements as of December 31, 2003 F-35
Index to statements of revenue over certain operating
expenses for the period January 1, 2003 to March 2, 2003 and
for the years ended December 31, 2002 and 2001 F-51
Montague Business Center
Index to financial statements as of September 30, 2004
(unaudited) F-56
Index to financial statements as of December 31, 2003 F-62
Index to statements of revenue over certain operating
expenses for the period January 1, 2002 to August 26, 2002
and for the year ended December 31, 2001 F-77
Royal Ridge
Index to financial statements as of September 30, 2004
(unaudited) F-82
Index to financial statements as of December 31, 2003 F-88
Index to statements of revenue over certain operating
expenses for the period January 1, 2003 to January 29, 2003
and for the year ended December 31, 2002 F-104
(b) Pro Forma Financial Information
Franklin Street Properties Corp. Unaudited Pro Forma Condensed
Combined Financial Statements F-109
(c) Exhibits
23.1 Consent of Braver and Company, P.C.
FSP Addison Circle Corp.
Financial Statements
September 30, 2004
Table of Contents
Page
Financial Statements
Balance Sheets as of September 30, 2004 and December 31, 2003............. F-3
Statements of Income for the three and nine months ended
September 30, 2004 and 2003......................................... F-4
Statements of Cash Flows for the nine months ended
September 30, 2004 and 2003......................................... F-5
Notes to Financial Statements............................................. F-6
F-2
FSP Addison Circle Corp.
Balance Sheets
(unaudited)
September 30, December 31,
(in thousands, except shares and par value amounts) 2004 2003
===================================================================================================
Assets:
Real estate investments, at cost:
Land $ 4,365 $ 4,365
Buildings and improvements 46,112 45,895
---------------------------------------------------------------------------------------------------
50,477 50,260
Less accumulated depreciation 2,406 1,519
---------------------------------------------------------------------------------------------------
Real estate investments, net 48,071 48,741
Acquired real estate leases, net of accumulated
amortization of $588 and $349 1,150 1,389
Cash and cash equivalents 5,492 5,966
Restricted cash 20 35
Tenant rents receivable 1 25
Step rent receivable 531 421
Deferred leasing costs, net of accumulated
amortization of $10 and $0 358 39
Prepaid expenses and other assets 99 51
---------------------------------------------------------------------------------------------------
Total assets $ 55,722 $ 56,667
===================================================================================================
Liabilities and stockholders' equity:
Liabilities:
Accounts payable and accrued expenses $ 1,694 $ 2,055
Dividends payable -- 1,265
Tenant security deposits 20 35
---------------------------------------------------------------------------------------------------
Total liabilities 1,714 3,355
---------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 636 shares
authorized, issued and outstanding -- --
Common stock, $.01 par value, 1 share
authorized, issued and outstanding -- --
Additional paid-in capital 58,383 58,383
Retained deficit and dividends in excess of earnings (4,375) (5,071)
---------------------------------------------------------------------------------------------------
Total stockholders' equity 54,008 53,312
---------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 55,722 $ 56,667
===================================================================================================
See accompanying notes to financial statements.
F-3
FSP Addison Circle Corp.
Statement of Income
(unaudited)
For the For the
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------------- ---------------------
(in thousands, except shares and per share amounts) 2004 2003 2004 2003
============================================================================================================
Revenues:
Rental $2,171 $2,115 $6,892 $6,448
------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 684 487 1,490 1,355
Real estate taxes and insurance 361 300 1,045 926
Depreciation and amortization 378 381 1,136 1,126
============================================================================================================
Total expenses 1,423 1,168 3,671 3,407
------------------------------------------------------------------------------------------------------------
Income before interest 748 947 3,221 3,041
Interest income 25 10 67 32
------------------------------------------------------------------------------------------------------------
Net income attributable to preferred stockholders $ 773 $ 957 $3,288 $3,073
============================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 636 636 636 636
============================================================================================================
Net income per preferred share, basic and diluted $1,215 $1,505 $5,170 $4,832
============================================================================================================
See accompanying notes to financial statements.
F-4
FSP Addison Circle Corp.
Statements of Cash Flows
For the Nine Months Ended
(in thousands) September 30, 2004 September 30, 2003
==========================================================================================================
Cash flows from operating activities:
Net Income $ 3,288 $ 3,073
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Depreciation and amortization 1,136 1,126
Changes in operating assets and liabilities:
Restricted cash 15 9
Tenant rent receivables 24 50
Step rent receivable (110) (241)
Prepaid expenses and other assets (48) (28)
Accounts payable and accrued expenses (361) (256)
Tenant security deposits (15) (9)
Payment of deferred leasing costs (329) --
----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 3,600 $ 3,724
----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (217) --
----------------------------------------------------------------------------------------------------------
Net cash used for investing activities (217) --
----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to stockholders (3,857) (3,446)
----------------------------------------------------------------------------------------------------------
Net cash used for financing activities (3,857) (3,446)
----------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (474) 278
Cash and cash equivalents, beginning of period 5,966 5,402
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 5,492 $ 5,680
==========================================================================================================
Supplemental disclosure of cash flow information:
Disclosure of non-cash financing activities:
Dividends declared but not paid $ -- $ 1,277
See accompanying notes to financial statements.
F-5
FSP Addison Circle Corp.
Notes to Financial Statements
(unaudited)
1. Organization and Basis of Presentation
FSP Addison Circle Corp. (the "Company") was organized on August 21, 2002 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a commercial office building located in Addison, TX (the "Property"). The
Property consists of a recently constructed, ten-story Class "A" suburban office
tower that contains approximately 293,787 square feet of space situated on
approximately 3.62 acres of land. The Company acquired the Property on September
30, 2002.
BASIS OF PRESENTATION
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included.
Certain balances in the 2003 financial statements have been reclassified to
conform to the 2004 presentation.
These financial statements should be read in conjunction with the Company's
financial statements and notes thereto for its fiscal year ended December 31,
2003.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
2. Net Income Per Share
Basic net income per preferred share is computed by dividing net income
attributed to preferred shareholders by the weighted average number of preferred
shares outstanding during the period. Diluted net income per preferred share
reflects the potential dilution that could occur if securities or other
contracts to issue shares were convertible into shares. There were no potential
dilutive shares outstanding at September 30, 2004 and 2003. Subsequent to the
completion of the offering of preferred shares, the holders of common stock are
not entitled to share in any income nor in any related dividend.
3. Income Taxes
The Company has elected to be taxed as a Real Estate Investment Trust ("REIT")
under Sections 856-860 of the Internal Revenue Code of 1986, as amended. In
order to qualify as a REIT, the Company is required to distribute at least 90%
of its taxable income to shareholders and to meet certain asset and income tests
as well as certain other requirements. The Company will generally not be liable
for federal income taxes, provided it satisfies these requirements. Even as a
qualified REIT, the Company is subject to certain state and local taxes on its
income and property.
F-6
FSP Addison Circle Corp.
Notes to Financial Statements
(unaudited)
4. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. Fees incurred
under the agreement were $20,000 and $19,000 for the three months ended
September 30, 2004 and 2003, respectively and $61,000 and $60,000 for the nine
months ended September 30, 2004 and 2003, respectively.
5. Subsequent Events
On October 1, 2004 the Company declared a dividend of $2,144.00 per share of
preferred stock payable to holders of record as of October 1, 2004.
F-7
FSP Addison Circle Corp.
Financial Statements
December 31, 2003 and 2002
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report............................................... F-9
Balance Sheets as of December 31, 2003 and 2002............................ F-10
Statements of Operations for the year ended December 31, 2003
and for the period August 21, 2002 (date of inception) to
December 31, 2002.................................................... F-11
Statements of Changes in Stockholders' Equity for the year ended
December 31, 2003 and for the period August 21, 2002
(date of inception) to December 31, 2002............................. F-12
Statements of Cash Flows for the year ended December 31, 2003
and for the period August 21, 2002 (date of inception) to
December 31, 2002.................................................... F-13
Notes to the Financial Statements......................................... F-14
F-8
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Addison Circle Corp.
We have audited the accompanying balance sheets of FSP Addison Circle Corp. as
of December 31, 2003 and 2002 and the related statements of operations, changes
in stockholders' equity and cash flows for the year ended December 31, 2003 and
for the period from August 21, 2002 (date of inception) to December 31, 2002.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Addison Circle Corp. as of
December 31, 2003 and 2002, and the results of its operations and its cash flows
for the year ended December 31, 2003 and for the initial period ended December
31, 2002, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
January 23, 2004
F-9
FSP Addison Circle Corp.
Balance Sheets
December 31, December 31,
(in thousands, except shares and par value amounts) 2003 2002
==================================================================================================
Assets:
Real estate investments, at cost:
Land $ 4,365 $ 4,365
Buildings and improvements 45,895 45,870
-------------------------------------------------------------------------------------------------
50,260 50,235
Less accumulated depreciation 1,519 343
-------------------------------------------------------------------------------------------------
Real estate investments, net 48,741 49,892
Acquired real estate leases, net of accumulated
amortization of $349 and $27 1,389 1,711
Cash and cash equivalents 3,330 2,683
Cash-funded reserves 2,636 2,719
Restricted cash 35 44
Tenant rents receivable 25 --
Step rent receivable 421 99
Deferred leasing costs 39 --
Prepaid expenses and other assets 51 80
-------------------------------------------------------------------------------------------------
Total assets $ 56,667 $ 57,228
=================================================================================================
Liabilities and stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 2,055 $ 1,890
Dividends payable 1,265 850
Tenant security deposits 35 44
-------------------------------------------------------------------------------------------------
Total liabilities 3,355 2,784
-------------------------------------------------------------------------------------------------
Commitments and contingencies:
Stockholders' equity:
Preferred stock, $.01 par value, 636 shares
authorized, issued and outstanding -- --
Common stock, $.01 par value, 1 share
authorized, issued and outstanding -- --
Additional paid-in capital 58,383 58,383
Retained deficit and dividends in excess of earnings (5,071) (3,939)
-------------------------------------------------------------------------------------------------
Total stockholders' equity 53,312 54,444
-------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 56,667 $ 57,228
=================================================================================================
See accompanying notes to financial statements.
F-10
FSP Addison Circle Corp.
Statements of Operations
For the Period
August 21, 2002
For the Year Ended (date of inception) to
(in thousands, except per share amounts) December 31, 2003 December 31, 2002
===========================================================================================================
Revenue:
Rental $8,554 $ 2,102
----------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 1,783 391
Real estate taxes and insurance 1,354 327
Depreciation and amortization 1,497 370
Interest -- 3,897
----------------------------------------------------------------------------------------------------------
Total expenses 4,634 4,985
----------------------------------------------------------------------------------------------------------
Income (loss) before interest income 3,920 (2,883)
Interest income 85 14
----------------------------------------------------------------------------------------------------------
Net income (loss) before common dividends 4,005 (2,869)
Distributions paid to common shareholders -- 313
----------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders $4,005 $(3,182)
===========================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 636 636
===========================================================================================================
Net income (loss) per preferred share, basic and diluted $6,297 $(5,003)
===========================================================================================================
See accompanying notes to financial statements.
F-11
FSP Addison Circle Corp.
Statements of Changes in Stockholders' Equity
For the year ended December 31, 2003 and for the Period August 21, 2002
(date of inception) to December 31, 2002
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
=============================================================================================================
Private offering of 636 shares, net $ -- $ -- $58,383 $ -- $ 58,383
Net loss -- -- -- (2,869) (2,869)
Distributions to stockholders -- -- -- (1,070) (1,070)
-------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 -- -- 58,383 (3,939) 54,444
Net income -- -- -- 4,005 4,005
Distributions to stockholders -- -- -- (5,137) (5,137)
-------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ -- $ -- $58,383 $(5,071) $ 53,312
=============================================================================================================
See accompanying notes to financial statements.
F-12
FSP Addison Circle Corp.
Statements of Cash Flows
For the Period
August 21, 2002
For the Year Ended (date of inception) to
(in thousands) December 31, 2003 December 31, 2002
============================================================================================================
Cash flows from operating activities:
Net income (loss) $ 4,005 $ (2,869)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,497 370
Changes in operating assets and liabilities:
Cash-funded reserve 83 (2,719)
Restricted cash 9 (44)
Tenant rent receivables (25) --
Step rent receivable (322) (99)
Prepaid expenses and other assets 29 (80)
Accounts payable and accrued expenses 165 1,890
Tenant security deposits (9) 44
Payment of deferred leasing costs (39) --
------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 5,393 (3,507)
------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (25) (50,235)
Purchase of acquired real estate leases -- (1,738)
------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (25) (51,973)
------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- 63,610
Syndication costs -- (5,227)
Distributions to stockholders (4,721) (220)
Proceeds from long-term debt -- 51,500
Principal payments on long-term debt -- (51,500)
------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (4,721) 58,163
------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 647 2,683
Cash and cash equivalents, beginning of period 2,683 --
------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 3,330 $ 2,683
============================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 3,897
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 1,265 $ 850
See accompanying notes to financial statements.
F-13
FSP Addison Circle Corp.
Notes to Financial Statements
1. Organization
FSP Addison Circle Corp. (the "Company") was organized on August 21, 2002 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a commercial office building located in Addison, TX (the "Property"). The
Property consists of a recently constructed, ten-story Class "A" suburban office
tower that contains approximately 293,787 square feet of space situated on
approximately 3.62 acres of land. The Company acquired the Property on September
30, 2002.
2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The results of operations from inception to December 31, 2002 are not
necessarily indicative of the results to be obtained for other interim periods
or for the full fiscal year.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvements
typically is provided by cash set aside at the time the Property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the assets are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight-line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture and equipment 5-7
F-14
FSP Addison Circle Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the Property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheets:
(in thousands)
Price per Offering Memorandum $ 51,500
Plus: Acquisition fees 318
Other acquisition costs 155
--------------------------------------------------
Total Acquisition Costs $ 51,973
==================================================
These costs are reported in the Company's Balance Sheets as follows:
Land $ 4,365
Building 45,870
Acquired real estate leases 1,738
--------------------------------------------------
Total reported on Balance Sheets $ 51,973
==================================================
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At December 31, 2003 and
2002, no such indicators of impairment were identified.
ACQUIRED REAL ESTATE LEASES
Acquired real estate leases are the estimated value of legal and leasing costs
related to acquired leases that were included in the purchase price when the
Company acquired the Property. Under SFAS No. 141 "Business Combinations" ("SFAS
141"), which was approved by the Financial Accounting Standards Board ("FASB")
in June 2001, the Company is required to segregate these costs from its
investment in real estate. The Company subsequently amortizes these costs on a
straight-line basis over the remaining life of the related leases. Amortization
expense of $322,000 and $27,000 is included in depreciation and amortization in
the Company's Statements of Operations for the year ended December 31, 2003 and
the period ended December 31, 2002, respectively.
Acquired real estate lease costs included in the purchase price of the property
were $1,738,000 and are being amortized over the weighted-average period of six
years in respect of the leases assumed.
The estimated annual amortization expense for the five years succeeding December
31, 2003 are as follows:
(in thousands)
2004 $ 321
2005 $ 321
2006 $ 321
2007 $ 321
2008 $ 105
F-15
FSP Addison Circle Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
Property. These funds typically are used for the payment of real estate assets
and deferred leasing commissions; however, there is no legal restriction on
their use and they may be used for any Company purpose.
RESTRICTED CASH
Restricted cash consists of tenant security deposits.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". The Company typically
classifies its debt securities as available-for-sale.
There were no investments in marketable securities at December 31, 2003 and
2002.
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
For the periods ended December 31, 2003 and 2002, rental income was derived from
various tenants. As such, future receipts are dependent upon the financial
strength of the lessees and their ability to perform under the lease agreements.
The following tenants represent greater than 10% of total revenue:
Year Period
Ended Ended
December 31, December, 31
2003 2002
McLeod USA Telecommunications Services, Inc. 31% 31%
The Staubach Company 28% 28%
J.D. Edwards World Solutions Company 20% 20%
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves, and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
F-16
FSP Addison Circle Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, was
$421,000 and $99,000 at December 31, 2003 and 2002, respectively.
TENANT RENTS RECEIVABLE
Tenant rents receivable are reported at the amount the Company expects to
collect on balances outstanding at year-end. Management monitors outstanding
balances and tenant relationships and concluded that any realization losses
would be immaterial.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount of
$5,227,000 have been reported as a reduction in Stockholders' Equity in the
Company's Balance Sheets.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its leases as
operating leases. Rental income from leases, which may include rent concession
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
Year Ended Period Ended
December 31, December, 31
(in thousands) 2003 2002
=======================================================
Income from leases $ 7,153 $ 1,823
Straight-line rent
adjustment 322 99
Reimbursable expenses 1,079 180
-------------------------------------------------------
Total $ 8,554 $ 2,102
=======================================================
INTEREST INCOME
Interest income is recognized when the related services are performed and the
earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a Real Estate Investment Trust ("REIT")
under the Internal Revenue Code of 1986, as amended. As a REIT, the Company
generally is entitled to a tax deduction for dividends paid to its shareholders,
thereby effectively subjecting the distributed net income of the Company to
taxation at the shareholder level only. The Company must comply with a variety
of restrictions to maintain its status as a REIT. These restrictions include the
type of income it can earn, the type of assets it can hold, the number of
shareholders it can have and the concentration of their ownership, and the
amount of the Company's taxable income that must be distributed annually.
F-17
FSP Addison Circle Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share. Basic net income
per preferred share is computed by dividing net income by the weighted average
number of shares outstanding during the period. Diluted net income per preferred
share reflects the potential dilution that could occur if securities or other
contracts to issue shares were convertible into shares. There were no potential
dilutive shares outstanding at December 31, 2003 and 2002. Subsequent to the
completion of the offering of preferred shares, the holders of common stock are
not entitled to share in any income nor in any related dividend.
3. Recent Accounting Standards
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The adoption of
this statement did not have a material effect on the Company's financial
position, results of operations and cash flows.
4. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies these requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2002, the Company incurred a net operating
loss for income tax purposes of approximately $2,932,000 that can be carried
forward until it expires in the year 2022.
At December 31, 2003, the Company's net tax basis of its real estate assets was
$50,421,000.
The following schedule reconciles net income (loss) to taxable income subject to
dividend requirements:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2003 2002
==========================================================================
GAAP net income (loss) $ 4,005 $ (2,869)
Add: Book depreciation and amortization 1,497 370
Less: Tax depreciation and amortization (1,193) (323)
Straight-line rents (322) (99)
--------------------------------------------------------------------------
Taxable income (loss)(1) $ 3,987 $ (2,921)
==========================================================================
(1) A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash dividends paid to the dividends paid
deduction:
F-18
Year Ended Year Ended
December 31, 2003 December 31, 2002
Per Preferred Per Common Per Preferred Per Common
(in thousands, except per share data) Total Share Share Total Share Share
---------------------------------------------------------------------------------------------------------------------
Cash distributions paid $ 4,721 $ 7,278 $ 93,807 $ 220 $ -- $ 220,000
Less: Return of captial (734) (1,133) (14,605) (220) -- (220,000)
---------------------------------------------------------------------------------------------------------------------
Dividends paid deduction $ 3,987 $ 6,145 $ 79,202 $ -- $ -- $ --
=====================================================================================================================
F-19
FSP Addison Circle Corp.
Notes to Financial Statements
5. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all dividends, if any, declared by the Board of Directors out of funds
legally available. The right to receive dividends shall be non-cumulative, and
no right to dividends shall accrue by reason of the fact that no dividend has
been declared in any prior year. Each holder of Shares will be entitled to
receive, to the extent that funds are available therefore, $100,000 per Share,
before any payment to the holder of Common Stock, out of distributions to
stockholders upon liquidation, dissolution or the winding up of the Company; the
balance of any such funds available for distribution will be distributed among
the holders of Shares and the holder of Common Stock, pro rata based on the
number of shares held by each; provided, however, that for these purposes, one
share of Common Stock will be deemed to equal one-tenth of a share of Preferred
Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to share in any income, nor in any related
dividend.
6. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the period
ended December 31, 2003 and 2002, fees incurred under the agreement were $79,000
and $19,000, respectively.
An acquisition fee of $318,000 and other costs of $67,000 were paid in 2002 to
an affiliate of the Common Shareholder. Such fees were included in the cost of
the real estate.
Syndication fees of $5,227,000 were paid in 2002 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2002, the Company borrowed and repaid in full a note payable to FSP,
principal of $51,500,000, with interest equal to the Citizens Bank base rate.
Interest paid to FSP was $240,000. The average interest rate during the time the
loan was outstanding was 4.44%.
A commitment fee of $3,657,000 was paid to FSP for obtaining the first mortgage
loan. Such amount is included in interest expense on the Statement of
Operations.
The Company paid a distribution of $313,000 to the common shareholder relating
to operating activities of the Company prior to the completion of the offering
of preferred shares.
F-20
FSP Addison Circle Corp.
Notes to Financial Statements
7. Commitments and Contingencies
The Company, as lessor, has minimum future rentals due under non-cancelable
operating leases as follows:
Year Ending
(in thousands) December 31, Amount
---------------- -------------
2004 $ 6,684
2005 6,636
2006 5,698
2007 3,101
2008 2,369
Thereafter 943
-------------
$ 25,431
=============
In addition, the lessees are liable for real estate taxes and certain operating
expenses of the Property.
Upon acquiring the commercial rental property in September, 2002, the Company
was assigned the lease agreements between the seller of the Property and the
existing tenants. The original lease periods range from five to ten years with
renewal options.
F-21
SCHEDULE III
ADDISON CIRCLE
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2003
Initial Cost
---------------------------------
Costs
Capitalized
Buildings (Disposals)
Improvements Subsequent
and to
Description Encumbrances (1) Land Equipment Acquisition
---------------- ---- --------- ------------
(in thousands)
Addison Circle, Addison, TX 4,365 45,870 25
Historical Costs
--------------------------------------------------------------------------------------
Buildings Total Costs,
Improvements Net of Depreciable
and Accumulated Accumulated Life Date of
Description Land Equipment Total (2) Depreciation Depreciation Years Acquisition
---- --------- --------- ------------ ------------ ----- -----------
(in thousands)
Addison Circle, Addison, TX 4,365 45,895 50,260 1,519 48,741 39 2002
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is $50,421.
F-22
Addison Circle
The following table summarizes the changes in the Company's real estate
investments and accumulated depreciation:
December 31,
----------------------
(in thousands) 2003 2002
==========================================================================
Real estate investments, at cost:
Balance, beginning of period $50,235 $ --
Acquisitions -- 50,235
Improvements 25 --
Dispositions -- --
--------------------------------------------------------------------------
Balance, end of period $50,260 $50,235
==========================================================================
Accumulated depreciation:
Balance, beginning of period $ 343 $ --
Depreciation 1,176 343
Dispositions -- --
--------------------------------------------------------------------------
Balance, end of period $ 1,519 $ 343
==========================================================================
F-23
ADDISON CIRCLE
FOR THE PERIOD JANUARY 1, 2002 TO SEPTEMBER 29, 2002
AND FOR THE YEAR ENDED DECEMBER 31, 2001
CONTENTS
PAGE
Independent auditors' report F-25
Statements of revenue over certain operating expenses F-26
Notes accompanying the statements of revenue over certain
operating expenses F-27
F-24
INDEPENDENT AUDITORS' REPORT
To the Stockholders
FSP Addison Circle Corp.
We have audited the accompanying statements of revenue over certain operating
expenses (the "Statements") of Addison Circle for the period January 1, 2002 to
September 29, 2002 and for the year ended December 31, 2001. These Statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these Statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the Statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the Statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall Statements'
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying Statements were prepared to comply with the requirements of
Rule 3-14 of Regulation S-X of the Securities and Exchange Commission, and
exclude certain expenses described in Note 2, and therefore, are not intended to
be a complete presentation of the Property's revenue and expenses.
In our opinion, these Statements referred to above present fairly, in all
material respects, the revenue over certain operating expenses (as described in
Note 2), of Addison Circle for the period January 1, 2002 to September 29, 2002
and for the year ended December 31, 2001, in conformity with the basis of
accounting described in Note 2.
/s/ Braver and Company, P.C.
Newton, Massachusetts
February 28, 2004
F-25
ADDISON CIRCLE
STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
FOR THE PERIOD JANUARY 1, 2002 TO SEPTEMBER 29, 2002 AND
FOR THE YEAR ENDED DECEMBER 31, 2001
2002 2001
---------- ----------
REVENUE
Rental income $6,577,352 $8,353,790
---------- ----------
CERTAIN OPERATING EXPENSES (Note 2):
Taxes and insurance 930,968 1,195,547
Management fees 105,094 135,923
Administrative 512,993 446,024
Operating and maintenance 649,685 905,373
---------- ----------
2,198,740 2,682,867
---------- ----------
Excess of revenue over certain operating expenses $4,378,612 $5,670,923
========== ==========
The accompanying notes are an integral part of these financial statements.
F-26
ADDISON CIRCLE
NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
1. DESCRIPTION OF THE PROPERTY:
The accompanying statements of revenue over certain operating expenses
(the "Statements") include the operations of a commercial building located
in Addison, Dallas County, Texas (the "Property"). These statements are
the results of operations of the Property under the basis of accounting
described in Note 2 for the period and year described prior to the
acquisition of the Property by FSP Addison Circle Corp. The Property
consists of a ten-story Class A suburban office tower containing
approximately 293,787 square feet located on approximately 3.62 acres of
land. The Property was sold to FSP Addison Circle Corp. on September 30,
2002.
2. BASIS OF ACCOUNTING:
The accompanying Statements have been prepared on the accrual basis of
accounting. The Statements have been prepared in accordance with Rule 3-14
of Regulation S-X of the Securities and Exchange Commission for real
estate properties acquired or to be acquired. Accordingly, these
Statements exclude certain historical expenses not comparable to the
operations of the Property after acquisition such as amortization,
depreciation, interest, corporate expenses and certain other costs not
directly related to the future operations of the Property.
3. REVENUE RECOGNITION:
Rental revenue includes income from leases, certain reimbursable expenses,
straight-line rent adjustments and other income associated with renting
the property. A summary of rental revenue is shown in the following table:
For the period
January 1, 2002 Year Ended
to September 29, December 31,
2002 2001
---------------- ------------
Income from leases $ 5,407,615 $7,168,574
Straight-line rent adjustment 258,696 293,420
Reimbursable expenses 909,682 887,543
Other income 1,359 4,253
---------------- ------------
Total $ 6,577,352 $8,353,790
================ ============
Addison Circle has retained substantially all of the risks and benefits of
the property and accounts for its leases as operating leases. Rental
income from leases, which include rent concessions (including free rent
and tenant improvement allowances) and scheduled increases in rental rates
during the lease term, is recognized on a straight-line basis. The Company
does not have any percentage rent arrangements with its tenants.
Reimbursable costs are included in rental income in the period earned.
4. USE OF ESTIMATES:
The preparation of the Statements in conformity with the basis of
accounting described in Note 2 requires management to make estimates and
assumptions that affect the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
F-27
ADDISON CIRCLE
NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
5. CONCENTRATIONS OF RISKS:
For the period January 1, 2002 to September 29, 2002, and for the year
ended December 31, 2001, rental income was received from various lessees.
As such, future receipts are dependent upon the financial strength of the
lessees and their ability to perform under the lease agreements.
6. LEASES:
The Company, as lessor, has minimum future rentals due under
noncancellable operating leases as follows:
Year Ending
December 31, Amount
----------------- --------------
2002 $ 1,704,000
2003 6,677,000
2004 6,684,000
2005 6,636,000
2006 5,698,000
Thereafter 6,413,000
--------------
$ 33,812,000
==============
In addition, the lessees are liable for real estate taxes and operating
expenses as direct expenses to them.
F-28
FSP Collins Crossing Corp.
Financial Statements
September 30, 2004
Table of Contents
Page
----
Financial Statements
Balance Sheet as of September 30, 2004 and December 31, 2003.............. F-30
Statement of Income for the three and nine months ended
September 30, 2004 and 2003.......................................... F-31
Statement of Cash Flows for the nine months ended
September 30, 2004 and 2003.......................................... F-32
Notes to Financial Statements............................................. F-33
F-29
FSP Collins Crossing Corp.
Balance Sheet
(unaudited)
September 30, December 31,
(in thousands,except shares and par value amounts) 2004 2003
============================================================================================================
Assets:
Real estate investments, at cost:
Land $ 4,022 $ 4,022
Buildings and improvements 34,232 34,224
------------------------------------------------------------------------------------------------------------
38,254 38,246
Less accumulated depreciation 1,389 731
------------------------------------------------------------------------------------------------------------
Real estate investments, net 36,865 37,515
Acquired real estate leases, net of accumulated amortization
of $663 and $349, respectively 1,604 1,918
Acquired favorable real estate lease, net of accumulated
amortization of $1,504 and $791, respectively 3,640 4,353
Cash and cash equivalents 4,634 5,066
Restricted cash 115 115
Tenant rents receivable 35 25
Step rent receivable 528 279
Prepaid expenses and other assets 51 43
------------------------------------------------------------------------------------------------------------
Total assets $ 47,472 $ 49,314
============================================================================================================
Liabilities and stockholders' equity:
Liabilities:
Accounts payable and accrued expenses $ 1,263 $ 1,467
Distributions payable -- 1,331
Tenant security deposits 115 115
------------------------------------------------------------------------------------------------------------
Total liabilities 1,378 2,913
------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 555 shares
authorized, issued and outstanding -- --
Common stock, $.01 par value, 1 share
authorized, issued and outstanding -- --
Additional paid-in capital 51,100 51,100
Retained deficit and dividends in excess of earnings (5,006) (4,699)
------------------------------------------------------------------------------------------------------------
Total stockholders' equity 46,094 46,401
------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 47,472 $ 49,314
============================================================================================================
See accompanying notes to financial statements.
F-30
FSP Collins Crossing Corp.
Statement of Income
(unaudited)
For the For the
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------------- ----------------------
(in thousands, except shares and per share amounts) 2004 2003 2004 2003
===========================================================================================================
Revenues:
Rental $1,756 $1,724 $5,205 $ 3,976
-----------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 552 418 1,461 922
Real estate taxes and insurance 237 273 715 614
Depreciation and amortization 324 265 972 619
Interest -- 4 -- 3,444
===========================================================================================================
Total expenses 1,113 960 3,148 5,599
-----------------------------------------------------------------------------------------------------------
Income (loss) before interest income 643 764 2,057 (1,623)
Interest income 12 7 51 12
-----------------------------------------------------------------------------------------------------------
Net income (loss) before common distibutions 655 771 2,108 (1,611)
Distributions paid to common stockholders -- 217 -- 370
-----------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred stockholders $ 655 $ 554 $2,108 $(1,981)
===========================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 555 555 555 555
===========================================================================================================
Net income (loss) per preferred share, basic and diluted $1,180 $ 998 $3,798 $(3,569)
===========================================================================================================
See accompanying notes to financial statements
F-31
FSP Collins Crossing Corp.
Statements of Cash Flows
For the Nine Months Ended
(in thousands) September 30, 2004 September 30, 2003
================================================================================================================
Cash flows from operating activities:
Net Income (loss) $ 2,108 $ (1,611)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization 972 619
Amortization of favorable lease 713 554
Changes in operating assets and liabilities:
Restricted cash -- (115)
Tenant rent receivables (10) (7)
Step rent receivable (249) (194)
Prepaid expenses and other assets (8) (66)
Accounts payable and accrued expenses (204) 927
Tenant security deposits -- 115
----------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 3,322 222
----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (8) (38,246)
Purchase of acquired real estate leases -- (2,267)
Purchase of acquired favorable real estate lease -- (5,144)
----------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (8) (45,657)
----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- 55,839
Syndication costs -- (4,738)
Distributions to stockholders (3,746) (1,245)
Proceeds from long-term debt -- 45,175
Principal payments on long-term debt -- (45,175)
----------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (3,746) 49,856
----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (432) 4,421
Cash and cash equivalents, beginning of period 5,066 --
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 4,634 $ 4,421
================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 3,444
Disclosure of non-cash financing activites:
Dividends declared but not paid $ -- $ 1,147
See accompanying notes to financial statements.
F-32
FSP Collins Crossing Corp.
Notes to Financial Statements
(unaudited)
1. Organization and Basis of Presentation
FSP Collins Crossing Corp. (the "Company") was organized on January 16, 2003 as
a Corporation under the laws of the State of Delaware to purchase, own and
operate a commercial office building located in Richardson, TX (the "Property").
Completed in 1999, the Property consists of an eleven story Class "A" suburban
office tower that contains approximately 298,766 square feet of space situated
on approximately ten acres of land (including an undeveloped parcel containing
approximately 3.5 acres). The company acquired the Property on March 3, 2003.
BASIS OF PRESENTATION
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included.
Certain prior-year balances have been reclassified in order to conform to the
current-year presentation.
These financial statements should be read in conjunction with the Company's
financial statements and notes thereto for its fiscal year ended December 31,
2003
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
2. Net Income Per Share
Basic net income per preferred share is computed by dividing net income
attributed to preferred shareholders by the weighted average number of preferred
shares outstanding during the period. Diluted net income per preferred share
reflects the potential dilution that could occur if securities or other
contracts to issue shares were convertible into shares. There were no potential
dilutive shares outstanding at September 30, 2004 and 2003. Subsequent to the
completion of the offering of preferred shares, the holders of common stock are
not entitled to share in any income nor in any related dividend.
3. Income Taxes
The Company has elected to be taxed as a Real Estate Investment Trust ("REIT")
under Sections 856-860 of the Internal Revenue Code of 1986, as amended. In
order to qualify as a REIT, the Company is required to distribute at least 90%
of its taxable income to shareholders and to meet certain asset and income tests
as well as certain other requirements. The Company will generally not be liable
for federal income taxes, provided it satisfies these requirements. Even as a
qualified REIT, the Company is subject to certain state and local taxes on its
income and property.
F-33
FSP Collins Crossing Corp.
Notes to Financial Statements
(unaudited)
4. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. Fees incurred
under the agreement were $19,000 and $19,000 for the three months ended
September 30, 2004 and 2003, respectively and $56,000 and $44,000 for the nine
months ended September 30, 2004 and 2003, respectively.
An acquisition fee of $277,000 and other costs of $206,000 were paid in the nine
months ended September 30, 2003 to an affiliate of the common shareholder. Such
fees were included in the cost of real estate.
Syndication fees of $4,410,000 were paid in the nine months ended September 30,
2003 to an affiliate of the common shareholder for services related to
syndication of the Company's preferred stock.
During the nine months ended September 30, 2003, the Company borrowed and repaid
in full a note payable to FSP, principal of $45,175,000 with interest equal to
the Citizens Bank base rate. Interest paid to FSP was $253,000. The average
interest rate during the time the loan was outstanding was 4.44%.
A commitment fee of $3,191,000 was paid to FSP during the nine months ended
September 30, 2003 for obtaining the first mortgage loan. Such amount is
included in interest expense on the Statement of Operations.
The Company paid a distribution of $370,000 during the nine months ended
September 30, 2003 to the common shareholder relating to operating activities of
the Company prior to the completion of the offering of preferred shares.
5. Subsequent Events
On October 1, 2004, the Company declared a dividend of $2,120.00 per share of
preferred stock payable to holders of record as of October 1, 2004.
F-34
FSP Collins Crossing Corp.
Financial Statements
December 31, 2003
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report............................................... F-36
Balance Sheet as of December 31, 2003...................................... F-37
Statement of Operations for the period January 16, 2003 (date of
inception) to December 31, 2003....................................... F-38
Statement of Changes in Stockholders' Equity for the period January
16, 2003 (date of inception) to December 31, 2003..................... F-39
Statement of Cash Flows for the period January 16, 2003 (date of
inception) to December 31, 2003....................................... F-40
Notes to the Financial Statements.......................................... F-41
F-35
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Collins Crossing Corp.
We have audited the accompanying balance sheet of FSP Collins Crossing Corp. as
of December 31, 2003, and the related statements of operations, changes in
stockholders' equity and cash flows for the period from January 16, 2003 (date
of inception) to December 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Collins Crossing Corp. as
of December 31, 2003, and the results of its operations and its cash flows for
the initial period then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
January 23, 2004
F-36
FSP Collins Crossing Corp.
Balance Sheet
December 31,
(in thousands, except shares and par value amounts) 2003
================================================================================
Assets:
Real estate investments, at cost:
Land $ 4,022
Buildings and improvements 34,224
--------------------------------------------------------------------------------
38,246
Less accumulated depreciation 731
--------------------------------------------------------------------------------
Real estate investments, net 37,515
Acquired real estate leases, net of accumulated
amortization of $349 1,918
Acquired favorable real estate lease, net of
accumulated amortization of $791 4,353
Cash and cash equivalents 2,942
Cash-funded reserves 2,124
Restricted cash 115
Tenant rents receivable 25
Step rent receivable 279
Prepaid expenses and other assets 43
--------------------------------------------------------------------------------
Total assets $ 49,314
================================================================================
Liabilities and stockholders' equity:
Liabilities:
Accounts payable and accrued expenses $ 1,467
Distributions payable to stockholders 1,331
Tenant security deposits 115
--------------------------------------------------------------------------------
Total liabilities 2,913
--------------------------------------------------------------------------------
Commitments and contingencies:
Stockholders' equity:
Preferred Stock, $.01 par value, 555 shares
authorized, issued and outstanding --
Common Stock, $.01 par value, 1 share
authorized, issued and outstanding --
Additional paid-in capital 51,100
Retained deficit and distributions in excess of earnings (4,699)
--------------------------------------------------------------------------------
Total stockholders' equity 46,401
--------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 49,314
================================================================================
See accompanying notes to financial statements.
F-37
FSP Collins Crossing Corp.
Statement of Operations
For the Period
January 16, 2003
(date of inception) to
(in thousands, except shares and per share amounts) December 31, 2003
================================================================================
Revenue:
Rental $ 5,672
--------------------------------------------------------------------------------
Total revenue 5,672
--------------------------------------------------------------------------------
Expenses:
Rental operating expenses 1,399
Real estate taxes and insurance 760
Depreciation and amortization 1,080
Interest 3,444
--------------------------------------------------------------------------------
Total expenses 6,683
--------------------------------------------------------------------------------
Net loss before interest income (1,011)
Interest income 35
--------------------------------------------------------------------------------
Net loss before distributions to common stockholder (976)
Distributions paid to common stockholder 373
--------------------------------------------------------------------------------
Net loss attributable to preferred stockholders $(1,349)
================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 555
================================================================================
Net loss per preferred share, basic and diluted $(2,431)
================================================================================
See accompanying notes to financial statements.
F-38
FSP Collins Crossing Corp.
Statement of Changes in Stockholders' Equity
For the Period January 16, 2003
(date of inception) to December 31, 2003
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
===============================================================================================================
Private offering of 555 shares, net $ -- $ -- $ 51,100 $ -- $ 51,100
Distributions -- -- -- (3,723) (3,723)
Net loss -- -- -- (976) (976)
---------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ -- $ -- $ 51,100 $ (4,699) $ 46,401
===============================================================================================================
See accompanying notes to financial statements.
F-39
FSP Collins Crossing Corp.
Statement of Cash Flows
For the Period
January 16, 2003
(date of inception) to
(in thousands) December 31, 2003
================================================================================
Cash flows from operating activities:
Net loss $ (976)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 1,080
Amortization of favorable lease 791
Changes in operating assets and liabilities:
Cash-funded reserve (2,124)
Restricted cash (115)
Tenant rents receivable (25)
Step rent receivable (279)
Prepaid expenses and other assets (43)
Accounts payable and accrued expenses 1,467
Tenant security deposits 115
--------------------------------------------------------------------------------
Net cash used for operating activities (109)
--------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (38,246)
Purchase of acquired real estate lease (2,267)
Purchase of acquired favorable real estate lease (5,144)
--------------------------------------------------------------------------------
Net cash used for investing activities (45,657)
--------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock 55,510
Syndication costs (4,410)
Distributions to stockholders (2,392)
Proceeds from long-term debt 45,175
Principal payments on long-term debt (45,175)
--------------------------------------------------------------------------------
Net cash provided by financing activities 48,708
--------------------------------------------------------------------------------
Net increase in cash and cash equivalents 2,942
Cash and cash equivalents, beginning of period --
--------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,942
================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 3,444
Disclosure of non-cash financing activities:
Distributions declared but not paid $ 1,331
See accompanying notes to financial statements.
F-40
FSP Collins Crossing Corp.
Notes to Financial Statements
1. Organization
FSP Collins Crossing Corp. (the "Company") was organized on January 16, 2003 as
a Corporation under the laws of the State of Delaware to purchase, own and
operate a commercial office building located in Richardson, TX (the "Property").
Completed in 1999, the Property consists of an eleven story Class "A" suburban
office tower that contains approximately 298,766 square feet of space situated
on approximately ten acres of land (including an undeveloped parcel containing
approximately 3.5 acres). The company acquired the Property on March 3, 2003.
2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The results of operations from inception to date are not necessarily indicative
of the results to be obtained for other interim periods or for the full fiscal
year.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvements
typically is provided by cash set aside at the time the Property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the assets are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight-line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture and Equipment 5-7
F-41
FSP Collins Crossing Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheet:
(in thousands)
--------------
Price per Offering Memorandum $ 45,175
Plus: Acquisition fees 277
Plus: Other acquisition costs 205
--------------------------------------------------
Total Acquisition Costs $ 45,657
==================================================
These costs are reported in the Company's Balance Sheet as follows:
Land $ 4,022
Building 34,224
Acquired real estate leases 2,267
Acquired favorable real estate
lease 5,144
--------------------------------------------------
Total reported on Balance Sheet $ 45,657
==================================================
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At December 31, 2003, no
such indicators of impairment were identified.
ACQUIRED REAL ESTATE LEASES
Acquired real estate leases represents the estimated value of legal and leasing
costs related to acquired leases that were included in the purchase price when
the Company acquired the Property. Under SFAS No. 141 "Business Combinations"
("SFAS 141"), which was approved by the Financial Accounting Standards Board
("FASB") in June 2001, the Company is required to segregate these costs from its
investment in real estate. The Company subsequently amortizes these costs on a
straight-line basis over the weighted-average remaining life of the related
leases. Amortization expense of $349,000 is included in Depreciation and
Amortization in the Company's Statement of Operations for the period ended
December 31, 2003.
Acquired real estate lease costs included in the purchase price of the property
were $2,267,000 and are being amortized over the period of five years in respect
of the leases assumed. Detail of the acquired real estate lease costs as of
December 31, 2003:
(in thousands)
--------------
Cost $ 2,267
Accumulated amortization 349
---------
Book value $ 1,918
=========
The estimated annual amortization expense for the five years succeeding December
31, 2003 are as follows:
(in thousands)
--------------
2004 $ 418
2005 $ 418
2006 $ 418
2007 $ 418
2008 $ 244
F-42
FSP Collins Crossing Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
ACQUIRED FAVORABLE REAL ESTATE LEASE
Acquired favorable real estate lease is the estimated benefit the Company
receives when the lease payments due under a tenant's lease exceed the market
rate of the lease at the date the property was acquired. Under SFAS 141 the
Company is required to report this value separately from its investment in real
estate. The Company subsequently amortizes this amount on a straight-line basis
over the remaining life of the tenant's lease. Amortization of $791,000 is shown
as a reduction of rental income in the Company's Statement of Operations for the
period ended December 31, 2003.
The acquired favorable real estate leases included in the purchase price of the
property was $5,144,000 and is being amortized over the period of five years in
respect of the lease assumed. Details of the acquired favorable real estate
lease as of December 31, 2003:
(in thousands)
--------------
Cost $ 5,144
Accumulated amortization 791
---------
Book value $ 4,353
=========
The estimated annual amortization expense for the five years succeeding December
31, 2003 are as follows:
(in thousands)
----------------
2004 $ 950
2005 $ 950
2005 $ 950
2007 $ 950
2008 $ 553
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
Property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any Company purpose.
RESTRICTED CASH
Restricted cash consists of tenant security deposits.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". The Company typically classifies its
debt securities as available-for-sale.
There were no investments in marketable securities at December 31, 2003.
F-43
FSP Collins Crossing Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
For the period ended December 31, 2003 rental income was derived from various
tenants. As such, future receipts are dependent upon the financial strength of
the lessees and their ability to perform under the lease agreements.
The following tenant represents greater than 10% of total revenue:
INET 80%
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is
$279,000 at December 31, 2003.
TENANT RENTS RECEIVABLE
Tenant rents receivable are reported at the amount the Company expects to
collect on balances outstanding at year-end. Management monitors outstanding
balances and tenant relationships and concluded that any realization losses
would be immaterial.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount of
$4,410,000 have been reported as reduction in Stockholders' Equity in the
Company's Balance Sheet.
F-44
FSP Collins Crossing Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial properties and accounts for its leases as
operating leases. Rental income from leases, which may include rent concession
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
Period Ended
December, 31
(in thousands) 2003
===================================================
Income from leases $ 5,559
Straight-line rent adjustment 279
Reimbursable expenses 625
Amortization of favorable lease (791)
---------------------------------------------------
Total $ 5,672
===================================================
INTEREST INCOME
Interest income is recognized when the related services are performed and the
earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended. As a REIT, the Company generally is entitled to a tax
deduction for dividends paid to its shareholders, thereby effectively subjecting
the distributed net income of the Company to taxation at the shareholder level
only. The Company must comply with a variety of restrictions to maintain its
status as a REIT. These restrictions include the type of income it can earn, the
type of assets it can hold, the number of shareholders it can have and the
concentration of their ownership, and the amount of the Company's taxable income
that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share. Basic net income
per share is computed by dividing net income by the weighted average number of
shares outstanding during the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
shares were convertible into shares. There were no potential dilutive shares
outstanding at December 31, 2003. Subsequent to the completion of the offering
of preferred shares, the holders of common stock are not entitled to share in
any income nor any related dividend.
3. Recent Accounting Standards
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The Company does
not anticipate that the adoption of this statement will have a material effect
on the Company's financial position, results of operations and cash flows.
F-45
FSP Collins Crossing Corp.
Notes to Financial Statements
4. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies their requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
At December 31, 2003, the Company's net tax basis of its real estate assets was
$41,634,000.
The following schedule reconciles GAAP net income to taxable income subject to
dividend requirements:
Period Ended
December 31,
(in thousands) 2003
==================================================================
GAAP net loss $ (976)
Add: Book depreciation and amortization 1,080
Amortization for favorable lease 791
Deferred rent 481
Less: Tax depreciation and amortization (812)
Straight-line rents (279)
-----------------------------------------------------------------
Taxable income subject to dividend requirement $ 285
==================================================================
The following schedule reconciles cash dividends paid to the dividends paid
deduction:
Period Ended
December 31,
Per Preferred Per Common
(in thousands, except per share data) Total Share Share
========================================================================
Cash dividends paid $ 2,392 $ 3,637 $ 370,000
Less: Return of Capital (2,392) 3,204 326,000
------------------------------------------------------------------------
Dividends paid deduction $ -- $ 433 $ 44,000
========================================================================
F-46
FSP Collins Crossing Corp.
Notes to Financial Statements
5. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all dividends, if any, declared by the Board of Directors out of funds
legally available. The right to receive dividends shall be non-cumulative, and
no right to dividends shall accrue by reason of the fact that no dividend has
been declared in any prior year. Each holder of Shares will be entitled to
receive, to the extent that funds are available therefore, $100,000 per Share,
before any payment to the holder of Common Stock, out of distributions to
stockholders upon liquidation, dissolution or the winding up of the Company; the
balance of any such funds available for distribution will be distributed among
the holders of Shares and the holder of Common Stock, pro rata based on the
number of shares held by each; provided, however, that for these purposes, one
share of Common Stock will be deemed to equal one-tenth of a share of Preferred
Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to receive any income, nor shall the Company
declare or pay any cash dividends on shares of Common Stock.
6. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the period
ended December 31, 2003, fees incurred under the agreement were $62,000.
An acquisition fee of $277,000 and other costs of $206,000 were paid in 2003 to
an affiliate of the Common Shareholder. Such fees were included in the cost of
the real estate.
Syndication fees of $4,410,000 were paid in 2003 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2003, the Company borrowed and repaid in full a note payable to FSP,
principal of $45,175,000 with interest equal to the Citizens Bank base rate.
Interest paid to FSP was $253,000. The average interest rate during the time the
loan was outstanding was 4.44%.
A commitment fee of $3,191,000 was paid to FSP for obtaining the first mortgage
loan. Such amount is included in interest expense on the Statement of
Operations.
The Company paid a distribution of $373,000 to the common shareholder relating
to operating activities of the Company prior to the completion of the offering
of preferred shares.
F-47
FSP Collins Crossing Corp.
Notes to Financial Statements
7. Commitments and Contingencies
The Company, as lessor, has minimum future rentals due under non-cancelable
operating leases as follows:
Year Ending
(in thousands) December 31, Amount
------------ ---------
2004 $ 6,701
2005 6,947
2006 6,036
2007 5,811
2008 5,811
Thereafter 8,688
---------
$ 39,994
=========
In addition, the lessees are liable for real estate taxes and certain operating
expenses of the Property.
Upon acquiring the commercial rental property in March 2003, the Company was
assigned the lease agreements between the seller of the Property and the
existing tenants. The original lease periods range from five to ten years with
renewal options.
F-48
SCHEDULE III
COLLINS CROSSING
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2003
Initial Cost
---------------------------------
Costs
Capitalized
Buildings (Disposals)
Improvements Subsequent
and to
Description Encumbrances (1) Land Equipment Acquisition
---------------- ---- --------- ------------
(in thousands)
Collins Crossing, Richardson, TX 4,022 34,224 --
Historical Costs
--------------------------------------------------------------------------------------
Buildings Total Costs,
Improvements Net of Depreciable
and Accumulated Accumulated Life Date of
Description Land Equipment Total (2) Depreciation Depreciation Years Acquisition
---- --------- --------- ------------ ------------ ----- -----------
(in thousands)
Collins Crossing, Richardson, TX 4,022 34,224 38,246 731 37,515 39 2003
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is $41,634.
F-49
Collins Crossing
The following table summarizes the changes in the Company's real estate
investments and accumulated depreciation:
December 31,
---------------
(in thousands) 2003
==========================================================================
Real estate investments, at cost:
Balance, beginning of period $ --
Acquisitions 38,246
Improvements --
Dispositions --
--------------------------------------------------------------------------
Balance, end of period $38,246
==========================================================================
Accumulated depreciation:
Balance, beginning of period $ --
Depreciation 731
Dispositions --
--------------------------------------------------------------------------
Balance, end of period $ 731
==========================================================================
F-50
COLLINS CROSSING
FOR THE PERIOD JANUARY 1, 2003 TO MARCH 2, 2003 AND
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
CONTENTS
PAGE
Independent auditors' report F-52
Statements of revenue over certain operating expenses F-53
Notes accompanying the statements of revenue over certain
operating expenses F-54
F-51
INDEPENDENT AUDITORS' REPORT
To the Stockholders
FSP Collins Crossing Corp.
We have audited the accompanying statements of revenue over certain operating
expenses (the "Statements") of Collins Crossing for the period January 1, 2003
to March 2, 2003 and for the years ended December 31, 2002 and 2001. These
Statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these Statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the Statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the Statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall Statements'
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying Statements were prepared to comply with the requirements of
Rule 3-14 of Regulation S-X of the Securities and Exchange Commission, and
exclude certain expenses described in Note 2 and, therefore, are not intended to
be a complete presentation of the Property's revenue and expenses.
In our opinion, these Statements referred to above present fairly, in all
material respects, the revenue over certain operating expenses (as described in
Note 2), of Collins Crossing for the period January 1, 2003 to March 2, 2003 and
for the years ended December 31, 2002 and 2001, in conformity with the basis of
accounting described in Note 2.
/s/ Braver and Company, P.C.
Newton, Massachusetts
February 28, 2004
F-52
COLLINS CROSSING
Statements of Revenue Over Certain Operating Expenses
For the PERIOD JANUARY 1, 2003 TO March 2, 2003 AND
FOR THE YEARS ENDED dECEMBER 31, 2002 and 2001
2003 2002 2001
---------- ---------- ----------
REVENUE
Rental income $1,347,445 $7,719,461 $7,231,817
---------- ---------- ----------
CERTAIN OPERATING EXPENSES (Note 2):
Taxes and insurance 156,372 906,803 1,080,465
Management fees 24,885 148,990 136,467
Administrative 18,688 64,208 59,948
Operating and maintenance 275,996 1,165,129 1,320,489
---------- ---------- ----------
475,941 2,285,130 2,597,369
---------- ---------- ----------
Excess of revenue over certain
operating expenses $ 871,504 $5,434,331 $4,634,448
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-53
COLLINS CROSSING
NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
1. DESCRIPTION OF THE PROPERTY:
The accompanying statements of revenue over certain operating expenses
(the "Statements") include the operations of a commercial building located
in Dallas County, Texas (the "Property"). These Statements are the results
of operations of the Property under the basis of accounting described in
Note 2 for the period and years described prior to the acquisition of the
Property by FSP Collins Crossing Corp. The Property consists of an
eleven-story Class "A" institutional quality suburban office tower
containing approximately 298,766 square feet located on approximately 10.0
acres of land. The Property was sold to FSP Collins Crossing Corp. on
March 3, 2003.
2. BASIS OF ACCOUNTING:
The accompanying Statements have been prepared on the accrual basis of
accounting. The Statements have been prepared in accordance with Rule 3-14
of Regulation S-X of the Securities and Exchange Commission for real
estate properties acquired or to be acquired. Accordingly, these
Statements exclude certain historical expenses not comparable to the
operations of the Property after acquisition such as amortization,
depreciation, interest, corporate expenses and certain other costs not
directly related to future operations of the Property.
3. REVENUE RECOGNITION:
Rental revenue includes income from leases, certain reimbursable expenses,
and straight-line rent adjustments associated with renting the property.
For the period Year Ended Year Ended
January 1, 2003 December 31, December 31,
to March 2, 2003 2002 2001
---------------- ------------ ------------
Income from leases $1,219,096 $6,747,319 $6,415,650
Straight-line rent adjustment 53,506 294,140 252,620
Reimbursable expenses 74,843 678,002 563,547
---------- ---------- ----------
Total $1,347,445 $7,719,461 $7,231,817
========== ========== ==========
Collins Crossing has retained substantially all of the risks and benefits
of the Property and accounts for its leases as operating leases. Rental
income from leases, which includes rent concessions (including free rent
and tenant improvement allowances) and scheduled increases in rental rates
during the lease term, is recognized on a straight-line basis. The Company
does not have any percentage rent arrangements with its tenants.
Reimbursable costs are included in rental income in the period earned.
USE OF ESTIMATES:
The preparation of the Statements in conformity with the basis of
accounting described in Note 2 requires management to make estimates and
assumptions that affect the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
CONCENTRATIONS OF RISKS:
For the period January 1, 2003 to March 2, 2003 and for the years ended
December 31, 2002 and 2001, rental income was from three lessees. As such,
future receipts are dependent upon the financial strength of these lessees
and their ability to perform under the lease agreements.
F-54
COLLINS CROSSING
NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
LEASES:
The Company, as lessor, has minimum future rentals due under
noncancellable operating leases as follows:
Year Ending
December 31, Amount
------------- -------------
2003 $ 5,604,000
2004 6,701,000
2005 6,947,000
2006 6,036,000
2007 5,811,000
Thereafter 14,499,000
-------------
$ 45,598,000
=============
In addition, the lessees are liable for real estate taxes and operating
expenses as direct expenses to them.
F-55
FSP Montague Business Center Corp.
Financial Statements
September 30, 2004
Table of Contents
Page
----
Financial Statements
Balance Sheets as of September 30, 2004 and December 31, 2003............. F-57
Statements of Income for the three and nine months ended
September 30, 2004 and 2003......................................... F-58
Statements of Cash Flows for the nine months ended September 30,
2004 and 2003....................................................... F-59
Notes to Financial Statements............................................. F-60
F-56
FSP Montague Business Center Corp.
Balance Sheet
(unaudited)
September 30, December 31,
(in thousands,except shares and par value amounts) 2004 2003
============================================================================================================================
Assets:
Real estate investments, at cost:
Land $ 10,500 $ 10,500
Buildings and improvements 10,499 10,499
----------------------------------------------------------------------------------------------------------------------------
20,999 20,999
Less accumulated depreciation 560 359
----------------------------------------------------------------------------------------------------------------------------
Real estate investments, net 20,439 20,640
Acquired real estate leases, net of accumulated amortization of $224 and $143 241 322
Acquired favorable real estate lease, net accumulated amortization of $2,616 and $1,744 2,616 3,488
Cash and cash equivalents 3,633 3,594
Step rent receivable 461 392
Prepaid expenses and other assets 22 14
----------------------------------------------------------------------------------------------------------------------------
Total assets $ 27,412 $ 28,450
============================================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 465 $ 411
Dividends payable -- 960
----------------------------------------------------------------------------------------------------------------------------
Total liabilities 465 1,371
----------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock, $.01 par value, 334 shares
authorized, issued and outstanding -- --
Common Stock, $.01 par value, 1 share
authorized, issued and outstanding -- --
Additional paid-in capital 30,652 30,652
Retained deficit and dividends in excess of earnings (3,705) (3,573)
----------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 26,947 27,079
----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 27,412 $ 28,450
============================================================================================================================
See accompanying notes to financial statements.
F-57
FSP Montague Business Center Corp.
Statement of Income
(unaudited)
For the For the
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------------- ---------------------
(in thousands, except shares and per share amounts) 2004 2003 2004 2003
=========================================================================================================================
Revenues:
Rental $ 878 $ 889 $2,592 $2,737
-------------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 143 60 273 235
Real estate taxes and insurance 69 90 210 262
Depreciation and amortization 94 92 282 276
=========================================================================================================================
Total expenses 306 242 765 773
-------------------------------------------------------------------------------------------------------------------------
Income (loss) before interest income 572 647 1,827 1,964
Interest income 5 9 34 28
-------------------------------------------------------------------------------------------------------------------------
Net income before common dividends 577 656 1,861 1,992
Dividends paid to common shareholders -- -- -- --
-------------------------------------------------------------------------------------------------------------------------
Net income attributable to preferred shareholders $ 577 $ 656 $1,861 $1,992
=========================================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 334 334 334 334
=========================================================================================================================
Net income per preferred share, basic and diluted $1,728 $1,964 $5,572 $5,964
=========================================================================================================================
See accompanying notes to financial statements.
F-58
FSP Montague Business Center Corp.
Statements of Cash Flows
For the Nine Months Ended
(in thousands) September 30, 2004 September 30, 2003
==================================================================================================================
Cash flows from operating activities:
Net Income $ 1,861 $ 1,992
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 282 276
Amortization of favorable leases 872 872
Changes in operating assets and liabilities:
Tenant rent receivable -- 25
Step rent receivable (69) (212)
Prepaid expenses and other assets (8) (16)
Accounts payable and accrued expenses 54 65
------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 2,992 3,002
------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- --
Purchase of acquired real estate leases -- --
------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- --
------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- --
Syndication costs -- --
Dividends to stockholders (2,953) (2,758)
Proceeds from long-term debt -- --
Principal payments on long-term debt -- --
------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (2,953) (2,758)
------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 39 244
Cash and cash equivalents, beginning of period 3,594 3,330
------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 3,633 $ 3,574
==================================================================================================================
Supplemental disclosure of cash flow information:
Disclosure of non-cash financing activities:
Dividends declared but not paid $ -- $ 956
See accompanying notes to financial statements.
F-59
FSP Montague Business Center Corp.
Notes to Financial Statements
(unaudited)
1. Organization and Basis of Presentation
FSP Montague Business Center Corp. (the "Company") was organized on July 22,
2002 as a Corporation under the laws of the State of Delaware to purchase, own
and operate two adjacent single-story research and development/office buildings
located in San Jose, California (the "Property"). The Property contains
approximately 145,951 square feet of space situated on approximately 9.95 acres
of land. The company acquired the Property on August 27, 2002.
BASIS OF PRESENTATION
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included.
Certain prior-year balances have been reclassified in order to conform to the
current-year presentation.
These financial statements should be read in conjunction with the Company's
financial statements and notes thereto for its fiscal year ended December 31,
2003.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
2. Net Income Per Share
Basic net income per preferred share is computed by dividing net income by the
weighted average number of preferred shares outstanding during the period.
Diluted net income per preferred share reflects the potential dilution that
could occur if securities or other contracts to issue shares were exercised or
converted into shares. There were no potential dilutive shares outstanding at
September 30, 2004. Subsequent to the completion of the offering of preferred
shares, the holders of common stock are not entitled to share in any income nor
in any related dividend.
3. Income Taxes
The Company has elected to be taxed as a Real Estate Investment Trust ("REIT")
under Sections 856-860 of the Internal Revenue Code of 1986, as amended. In
order to qualify as a REIT, the Company is required to distribute at least 90%
of its taxable income to shareholders and to meet certain asset and income tests
as well as certain other requirements. The Company will generally not be liable
for federal income taxes, provided it satisfies these requirements. Even as a
qualified REIT, the Company is subject to certain state and local taxes on its
income and property
F-60
FSP Montague Business Center Corp.
Notes to Financial Statements
(unaudited)
4. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. Fees incurred
under the agreement were $12,000 and $11,000 for the three months ended
September 30, 2004 and 2003, respectively and $34,000 and $34,000 for the nine
months ended September 30, 2004 and 2003 respectively.
5. Subsequent Events
On October 1, 2004, the Company declared a dividend of $3,000.00 per share of
preferred stock payable to holders of record as of October 1, 2004.
F-61
FSP Montague Business Center Corp.
Financial Statements
December 31, 2003 and 2002
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report............................................. F-63
Balance Sheets as of December 31, 2003 and 2002.......................... F-64
Statements of Operations for the year ended December 31, 2003
and for the period July 22, 2002 (date of inception) to
December 31, 2002.................................................. F-65
Statements of Changes in Stockholders' Equity for the year ended
December 31, 2003 and for the period July 22, 2002 (date of
inception) to December 31, 2002.................................... F-66
Statements of Cash Flows for the year ended December 31, 2003
and for the period July 22, 2002 (date of inception) to
December 31, 2002.................................................. F-67
Notes to the Financial Statements........................................ F-68
F-62
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Montague Business Center Corp.
We have audited the accompanying balance sheets of FSP Montague Business Center
Corp. as of December 31, 2003, and 2002, and the related statements of
operations, changes in stockholders' equity and cash flows for the year ended
December 31, 2003 and for the period from July 22, 2002 (date of inception) to
December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Montague Business Center
Corp. as of December 31, 2003 and 2002, and the results of its operations and
its cash flows for the year ended December 31, 2003 and for the initial period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
January 23, 2004
F-63
FSP Montague Business Center Corp.
Balance Sheets
December 31, December 31,
(in thousands, except shares and par value amounts) 2003 2002
=============================================================================================================
Assets:
Real estate investments, at cost:
Land $ 10,500 $ 10,500
Buildings and improvements 10,499 10,144
-------------------------------------------------------------------------------------------------------------
20,999 20,644
Less accumulated depreciation 359 98
-------------------------------------------------------------------------------------------------------------
Real estate investments, net 20,640 20,546
Acquired real estate lease, net of accumulated amortization of $143 and $36 322 429
Acquired favorable real estate lease, net of accumulated amortization
of $1,744 and $581 3,488 4,651
Cash and cash equivalents 1,587 957
Cash-funded reserves 2,007 2,373
Step rent receivable 392 130
Prepaid expenses and other assets 14 25
-------------------------------------------------------------------------------------------------------------
Total assets $ 28,450 $ 29,111
=============================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 411 $ 28
Distributions payable 960 902
-------------------------------------------------------------------------------------------------------------
Total liabilities 1,371 930
-------------------------------------------------------------------------------------------------------------
Commitments and Contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value, 334 shares
authorized, issued and outstanding -- --
Common Stock, $.01 par value, 1 share
authorized, issued and outstanding -- --
Additional paid-in capital 30,652 30,652
Retained deficit and distributions in excess of earnings (3,573) (2,471)
-------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 27,079 28,181
-------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 28,450 $ 29,111
=============================================================================================================
See accompanying notes to financial statements.
F-64
FSP Montague Business Center Corp.
Statements of Operations
For the Period
For the July 22, 2002
Year Ended (date of inception) to
(in thousands, except shares and per share amounts) December 31, 2003 December 31, 2002
=============================================================================================================
Revenue:
Rental $3,645 $ 1,008
-------------------------------------------------------------------------------------------------------------
Total revenue 3,645 1,008
-------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 314 103
Real estate taxes and insurance 339 83
Depreciation and amortization 368 134
Interest -- 1,949
-------------------------------------------------------------------------------------------------------------
Total expenses 1,021 2,269
-------------------------------------------------------------------------------------------------------------
Net income (loss) before interest income 2,624 (1,261)
Interest income 45 12
-------------------------------------------------------------------------------------------------------------
Net income (loss) before common dividends 2,669 (1,249)
Distributions paid to common shareholders -- 32
-------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders $2,669 $(1,281)
=============================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 334 334
=============================================================================================================
Net income (loss) per preferred share, basic and diluted $7,991 $(3,835)
=============================================================================================================
See accompanying notes to financial statements.
F-65
FSP Montague Business Center Corp.
Statements of Changes in Stockholders' Equity
For the Year ended December 31, 2003
and for the Period July 22, 2002
(date of inception) to December 31, 2002
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
===========================================================================================================================
Private offering of 334 shares, net $ -- $ -- $ 30,652 $ -- $ 30,652
Distributions to stockholders -- -- -- (1,222) (1,222)
Net loss -- -- -- (1,249) (1,249)
---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 -- -- 30,652 (2,471) 28,181
Distributions to stockholders -- -- -- (3,771) (3,771)
Net income -- -- -- 2,669 2,669
---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ -- $ -- $ 30,652 $ (3,573) $ 27,079
===========================================================================================================================
See accompanying notes to financial statements.
F-66
FSP Montague Business Center Corp.
Statements of Cash Flows
For the Period
For the July 22, 2002
Year Ended (date of inception) to
December 31, December 31,
(in thousands) 2003 2002
=====================================================================================================
Cash flows from operating activities:
Net income (loss) $ 2,669 $ (1,249)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 368 134
Amortization of favorable lease 1,164 581
Changes in operating assets and liabilities:
Cash-funded reserves 366 (2,373)
Step rent receivables (262) (130)
Prepaid expenses and other assets 11 (25)
Accounts payable and accrued expenses 383 28
-----------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 4,699 (3,034)
-----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (355) (20,644)
Purchase of acquired real estate leases -- (465)
Purchase of acquired favorable real estate leases -- (5,232)
-----------------------------------------------------------------------------------------------------
Net cash used for investing activities (355) (26,341)
-----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- 33,410
Syndication costs -- (2,758)
Distributions to stockholders (3,714) (320)
Proceeds from long-term debt -- 26,000
Principal payments on long-term debt -- (26,000)
-----------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (3,714) 30,332
-----------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 630 957
Cash and cash equivalents, beginning of period 957 --
-----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,587 $ 957
=====================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 1,949
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 960 $ 902
See accompanying notes to financial statements.
F-67
FSP Montague Business Center Corp.
Notes to Financial Statements
1. Organization
FSP Montague Business Center Corp. (the "Company") was organized on July 22,
2002 as a Corporation under the laws of the State of Delaware to purchase, own
and operate two adjacent single-story research and development/office buildings
located in San Jose, California (the "Property"). The Property contains
approximately 145,951 square feet of space situated on approximately 9.95 acres
of land. The Company acquired the Property on August 27, 2002.
2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The results of operations from inception to December 31, 2002 are not
necessarily indicative of the results to be obtained for other interim periods
or for the full fiscal year.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvements
typically is provided by cash set aside at the time the Property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the assets are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture and equipment 5-7
F-68
FSP Montague Business Center Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the Property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheets:
(in thousands)
--------------
Price per Offering Memorandum $ 26,000
Plus: Acquisition fees 167
Plus: Other acquisition costs 174
--------------------------------------------------
Total Acquisition Costs $ 26,341
==================================================
These costs are reported in the Company's Balance Sheets as follows:
Land $ 10,500
Building 10,144
Acquired real estate lease 465
Acquired favorable lease 5,232
--------------------------------------------------
Total reported on Balance
Sheet $ 26,341
==================================================
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At December 31, 2003 and
2002 no such indicators of impairment were identified.
ACQUIRED REAL ESTATE LEASE
Acquired real estate lease represents the estimated value of legal and leasing
costs related to the acquired leases that were included in the purchase price
when the Company acquired the Property. Under SFAS No. 141 "Business
Combinations" , which was approved by the Financial Accounting Standards Board
("FASB") in June 2001, the Company is required to segregate these costs from its
investment in real estate. The Company subsequently amortizes these costs on a
straight-line basis over life of the related lease. Amortization expense of
approximately $107,000 and $36,000 is included in depreciation and amortization
in the Company's Statements of Operations for the periods ended December 31,
2003 and 2002, respectively.
The acquired real estate lease included in the purchase price of the property
was $465,000 and is being amortized over a period of five years.
The estimated annual amortization expense for the three years succeeding
December 31, 2003 are as follows:
(in thousands)
--------------
2004 $ 107
2005 $ 107
2006 $ 107
F-69
FSP Montague Business Center Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
ACQUIRED FAVORABLE REAL ESTATE LEASE
Acquired favorable real estate lease represents the value related to the leases
when the lease payments due under a tenant's lease exceed the market rate of the
lease at the date the Property was acquired. Under SFAS 141 the Company is
required to capitalize this difference and report it separately from its
investment in real estate. The Company subsequently amortizes this amount on a
straight-line basis over the remaining life of the tenant's lease. Amortization
of $1,164,000 and $581,000 is shown as a reduction of rental income in the
Company's Statements of Operations for the periods ended December 31, 2003 and
2002, respectively.
The acquired favorable real estate lease included in the purchase price of the
property was $5,232,000 and is being amortized over a period of five years in
respect of the lease assumed.
The estimated annual amortization expense for the three years succeeding
December 31, 2003 are as follows:
(in thousands)
--------------
2004 $ 1,163
2005 $ 1,163
2006 $ 1,162
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
Property. These funds typically are used for the payment of real estate assets
and deferred leasing commissions; however, there is no legal restriction on
their use and they may be used for any Company purpose.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". The Company typically
classifies its debt securities as available-for-sale.
There were no investments in marketable securities at December 31, 2003 and
2002.
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
For the periods ended December 31, 2003 and 2002, 100% of the rental income was
derived from one tenant, Novellus Systems, Inc. As such, future receipts are
dependent upon the financial strength of the lessee and its ability to perform
under the lease agreement.
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents and
cash-funded reserves approximate their fair values based on their short-term
maturity and prevailing interest rates.
F-70
FSP Montague Business Center Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable which is the
cumulative revenue recognized in excess of amounts billed by the Company, was
$392,000 and $130,000 at December 31, 2003 and 2002, respectively.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs in the amount of
$2,758,000 have been reported as a reduction in Stockholders' Equity in the
Company's Balance Sheet.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its lease as an
operating lease. Rental income from the lease, which may include rent concession
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenant. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
Year Ended Period Ended
December, 31 December, 31
(in thousands) 2003 2002
============================================================
Income from leases $ 3,789 $ 1,269
Straight-line rent adjustment 262 130
Reimbursable expenses 758 190
Amortization of acquired
favorable real estate lease (1,164) (581)
------------------------------------------------------------
Total $ 3,645 $ 1,008
============================================================
INTEREST INCOME
Interest income is recognized when the related services are performed and the
earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a Real Estate Investment Trust ("REIT")
under the Internal Revenue Code of 1986, as amended. As a REIT, the Company
generally is entitled to a tax deduction for dividends paid to its shareholders,
thereby effectively subjecting the distributed net income of the Company to
taxation at the shareholder level only. The Company must comply with a variety
of restrictions to maintain its status as a REIT. These restrictions include the
type of income it can earn, the type of assets it can hold, the number of
shareholders it can have and the concentration of their ownership, and the
amount of the Company's taxable income that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share. Basic net income
per preferred share is computed by dividing net income by the weighted average
number of preferred shares outstanding during the period. Diluted net income per
preferred share reflects the potential dilution that could occur if securities
or other contracts to issue shares were convertible into shares. There were no
potential dilutive shares outstanding at December 31, 2003 and 2002. Subsequent
to the completion of the offering of preferred shares, the holders of common
stock are not entitled to share in any income nor in any related dividend.
F-71
FSP Montague Business Center Corp.
Notes to Financial Statements.
3. Recent Accounting Standards
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The adoption of
this statement did not have a material effect on the Company's financial
position, results of operations and cash flows.
4. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies these requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2002, the Company incurred a net operating
loss for income tax purposes of approximately $810,000 that can be carried
forward until it expires in the year 2022.
At December 31, 2003, the Company's net tax basis of its real estate assets was
$26,136,000.
The following schedule reconciles net income (loss) to taxable income subject to
dividend requirements:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2003 2002
==============================================================================
GAAP net income (loss) $ 2,669 $ (1,249)
Add: Book depreciation and amortization 368 134
Amortization of favorable lease 1,164 581
Deferred rent 379 --
Less: Tax depreciation and amortization (399) (142)
Straight-line rents (262) (130)
------------------------------------------------------------------------------
Taxable income (loss)(1) subject to a dividend
requirement $ 3,919 $ (806)
==============================================================================
(1) A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash dividends paid to the dividends paid
deduction:
Year Ended Year Ended
December 31, 2003 December 31, 2002
Per Preferred Per Common Per Preferred Per Common
(in thousands, except per share data) Total Share Share Total Share Share
---------------------------------------------------------------------------------------------------------------------
Cash distributions paid $ 3,714 $11,120 $ -- $ 320 $ 288,000 $ 3,200
Less: Return of captial -- -- -- (320) (288,000) (3,200)
---------------------------------------------------------------------------------------------------------------------
Dividends paid deduction $ 3,714 $11,120 $ -- $ -- $ -- $ --
=====================================================================================================================
F-72
FSP Montague Business Center Corp.
Notes to Financial Statements
5. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all dividends, if any, declared by the Board of Directors out of funds
legally available. The right to receive dividends shall be non-cumulative, and
no right to dividends shall accrue by reason of the fact that no dividend has
been declared in any prior year. Each holder of Shares will be entitled to
receive, to the extent that funds are available therefore, $100,000 per Share,
before any payment to the holder of Common Stock, out of distributions to
stockholders upon liquidation, dissolution or the winding up of the Company; the
balance of any such funds available for distribution will be distributed among
the holders of Shares and the holder of Common Stock, pro rata based on the
number of shares held by each; provided, however, that for these purposes, one
share of Common Stock will be deemed to equal one-tenth of a share of Preferred
Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the holder of the Company's Common
Stock. FSP has the right, as one class together with the holders of Preferred
Stock, to vote to elect the directors of the Company and to vote on all matters
except those voted by the holders of Shares of Preferred Stock. Subsequent to
the completion of the offering of the preferred shares the holders of common
shares are not entitled to share in any earnings nor any related dividend.
6. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the years
ended December 31, 2003 and 2002, fees incurred under the agreement were $45,000
and $14,000, respectively.
An acquisition fee of $167,000 and other costs of $104,000 were paid in 2002 to
an affiliate of the Common Shareholder. Such fees were included in the cost of
the real estate.
Syndication fees of $2,758,000 were paid in 2002 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2002, the Company borrowed and repaid in full a note payable to FSP,
principal of $26,000,000, with interest equal to the Citizens Bank base rate.
Interest paid to FSP was $29,000. The average interest rate during the time the
loan was outstanding was 4.75%.
A commitment fee of $1,920,000 was paid to FSP for obtaining the first mortgage
loan and is included in interest expense on the Statement of Operations.
The Company paid a distribution of $32,000 to the common shareholder relating to
operating activities of the Company prior to the completion of the offering of
preferred shares.
F-73
FSP Montague Business Center Corp.
Notes to Financial Statements
7. Commitments and Contingencies
The Company, as lessor, has minimum future rentals due under a non-cancelable
operating lease as follows:
Year Ending
(in thousands) December 31, Amount
-------------- ------------ ----------
2004 $ 3,982
2005 4,174
2006 4,390
----------
$ 12,546
==========
In addition, the lessee is liable for real estate taxes and certain operating
expenses of the Property.
F-74
SCHEDULE III
MONTAGUE BUSINESS CENTER
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2003
Initial Cost
---------------------------------
Costs
Capitalized
Buildings (Disposals)
Improvements Subsequent
and to
Description Encumbrances (1) Land Equipment Acquisition
---------------- ---- --------- ------------
(in thousands)
Montague Business Center, San Jose, CA 10,500 10,499 --
Historical Costs
-------------------------------------------------------------------------------------
Buildings Total Costs,
Improvements Net of Depreciable
and Accumulated Accumulated Life Date of
Description Land Equipment Total (2) Depreciation Depreciation Years Acquisition
---- --------- --------- ------------ ------------ ----- -----------
(in thousands)
Montague Business Center, San Jose, CA 10,500 10,499 20,999 359 20,640 5-39 2002
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is $26,136.
F-75
Montague Business Center
The following table summarizes the changes in the Company's real estate
investments and accumulated depreciation:
December 31,
----------------------
(in thousands) 2003 2002
==========================================================================
Real estate investments, at cost:
Balance, beginning of period $20,644 $ --
Acquisitions -- 20,644
Improvements 355 --
Dispositions -- --
--------------------------------------------------------------------------
Balance, end of period $20,999 $20,644
==========================================================================
Accumulated depreciation:
Balance, beginning of period $ 98 $ --
Depreciation 261 98
Dispositions -- --
--------------------------------------------------------------------------
Balance, end of period $ 359 $ 98
==========================================================================
F-76
MONTAGUE BUSINESS CENTER
FOR THE PERIOD JANUARY 1, 2002 TO AUGUST 26, 2002
AND FOR THE YEAR ENDED DECEMBER 31, 2001
CONTENTS
PAGE
Independent auditors' report F-78
Statements of revenue over certain operating expenses F-79
Notes accompanying the statements of revenue over certain operating
expenses F-80
F-77
INDEPENDENT AUDITORS' REPORT
To the Stockholders
FSP Montague Business Center Corp.
We have audited the accompanying statements of revenue over certain operating
expenses (the "Statements") of Montague Business Center for the period January
1, 2002 to August 26, 2002 and for the year ended December 31, 2001. These
Statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these Statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the Statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the Statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall Statements'
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying Statements were prepared to comply with the requirements of
Rule 3-14 of Regulation S-X of the Securities and Exchange Commission, and
exclude certain expenses described in Note 2 and, therefore, are not intended to
be a complete presentation of the Property's revenue and expenses.
In our opinion, these Statements referred to above present fairly, in all
material respects, the revenue over certain operating expenses (as described in
Note 2) of Montague Business Center for the period January 1, 2002 to August 26,
2002 and for the year ended December 31, 2001, in conformity with the basis of
accounting described in Note 2.
/s/ Braver and Company, P.C.
Newton, Massachusetts
February 28, 2004
F-78
MONTAGUE BUSINESS CENTER
Statements of Revenue Over Certain Operating Expenses
For the PERIOD JANUARY 1, 2002 TO aUGUST 26, 2002
and For the year ended december 31, 2001
2002 2001
------------ ------------
REVENUE:
Rental income $ 2,772,694 $ 3,822,325
------------ ------------
CERTAIN OPERATING EXPENSES (Note 2):
Taxes and insurance 117,594 223,859
Management fees 44,055 81,426
Administrative 11,095 4,169
Operating and maintenance 60,751 115,926
------------ ------------
233,495 425,380
------------ ------------
Excess of revenue over certain operating expenses $ 2,539,199 $ 3,396,945
============ ============
The accompanying notes are an integral part of these financial statements.
F-79
MONTAGUE BUSINESS CENTER
NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
1. DESCRIPTION OF THE PROPERTY:
The accompanying statements of revenue over certain operating expenses
(the "Statements") include the operations of a commercial building located
in San Jose, California (the "Property"). These Statements are the results
of operations of the Property under the basis of accounting described in
Note 2 for the period and year described prior to the acquisition of the
Property by FSP Montague Business Center Corp. The Property consists of
two adjacent single-story Class "A" suburban office buildings containing
approximately 145,951 square feet located on approximately 9.95 acres of
land. The Property was sold to FSP Montague Business Center Corp. on
August 27, 2002.
2. BASIS OF ACCOUNTING:
The accompanying statements have been prepared on the accrual basis of
accounting. The Statements have been prepared in accordance with Rule 3-14
of Regulation S-X of the Securities and Exchange Commission for real
estate properties acquired or to be acquired. Accordingly, these
Statements exclude certain historical expenses not comparable to the
operations of the Property after acquisition such as amortization,
depreciation, interest, corporate expenses and certain other costs not
directly related to future operations of the Property.
3. REVENUE RECOGNITION:
Rental revenue includes income from leases, certain reimbursable expenses,
straight-line rent adjustments and other income associated with renting
the property. A summary of rental revenue is shown in the following table:
For the period
January 1, 2002 Year Ended
to August 26, 2002 December 31, 2001
------------------ -----------------
Income from leases $2,202,756 $2,731,934
Straight-line rent adjustment 245,307 679,196
Reimbursable expenses 317,190 411,195
Other income 7,441 --
----------- -----------
Total $2,772,694 $3,822,325
=========== ===========
Montague Business Center has retained substantially all of the risks and
benefits of the Property and accounts for its leases as operating leases.
Rental income from leases, which include rent concessions (including free
rent and tenant improvement allowances) and scheduled increases in rental
rates during the lease term, is recognized on a straight-line basis. The
Company does not have any percentage rent arrangements with its tenants.
Reimbursable costs are included in rental income in the period earned.
4. USE OF ESTIMATES:
The preparation of the Statements in conformity with the basis of
accounting described in Note 2 requires management to make estimates and
assumptions that affect the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
F-80
MONTAGUE BUSINESS CENTER
NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
8. CONCENTRATIONS OF RISKS:
For the period January 1, 2002 to August 26, 2002, and for the year ended
December 31, 2001, rental income was from various lessees. As such, future
receipts are dependent upon the financial strength of the lessees and
their ability to perform under the lease agreements.
6. LEASES:
The Company, as lessor, has minimum future rentals due under
noncancellable operating leases as follows:
Year Ending
December 31, Amount
------------ ------------
2002 $ 1,269,000
2003 3,789,000
2004 3,982,000
2005 4,174,000
2006 4,390,000
-------------
$ 17,604,000
=============
In addition, the lessees are liable for real estate taxes and operating
expenses as direct expenses to them.
F-81
FSP Royal Ridge Corp.
Financial Statements
September 30, 2004
Table of Contents
Page
----
Financial Statements
Balance Sheet as of September 30, 2004 and December 31, 2003............... F-83
Statement of Income for the three and nine months ended September
30, 2004............................................................. F-84
Statement of Cash Flows for the nine months ended September
30, 2004 and 2003.................................................... F-85
Notes to Financial Statements.............................................. F-86
F-82
FSP Royal Ridge Corp.
Balance Sheet
(unaudited)
September 30, December 31,
(in thousands,except shares and par value amounts) 2004 2003
=============================================================================================================================
Assets:
Real estate investments, at cost:
Land $ 1,649 $ 1,649
Buildings and improvements 16,224 16,224
----------------------------------------------------------------------------------------------------------------------------
17,873 17,873
Less accumulated depreciation 687 375
----------------------------------------------------------------------------------------------------------------------------
Real estate investments, net 17,186 17,498
Acquired real estate leases, net of accumulated amortization of $260 and $143 858 975
Acquired favorable real estate lease, net of accumulated net amortization of $775 and $426 2,558 2,907
Cash and cash equivalents 2,510 2,251
Restricted cash 571 571
Step rent receivable 1,040 954
Prepaid expenses and other assets 9 14
----------------------------------------------------------------------------------------------------------------------------
Total assets $ 24,732 $ 25,170
=============================================================================================================================
Liabilities and stockholders' equity:
Liabilities:
Accounts payable and accrued expenses $ 475 $ 240
Dividends payable -- 536
----------------------------------------------------------------------------------------------------------------------------
Total liabilities 475 776
----------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 297.5 shares
authorized, issued and outstanding -- --
Common stock, $.01 par value, 1 share
authorized, issued and outstanding -- --
Additional paid-in capital 27,277 27,277
Retained deficit and dividends in excess of earnings (3,020) (2,883)
----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 24,257 24,394
----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 24,732 $ 25,170
=============================================================================================================================
See accompanying notes to financial statements.
F-83
FSP Royal Ridge Corp.
Statement of Income
(unaudited)
For the For the
Three Months Nine Months
Ended Ended
September 30, September 30,
------------------- -----------------------
(in thousands, except shares and per share amounts) 2004 2003 2004 2003
==================================================================================================================
Revenues:
Rental $ 769 $ 728 $2,286 $ 1,562
-----------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 290 209 693 488
Real Estate Taxes and insurance 81 66 250 214
Depreciation and amortization 143 130 429 367
Interest -- -- -- 1,731
==================================================================================================================
Total expenses 514 405 1,372 2,800
-----------------------------------------------------------------------------------------------------------------
Income (loss) before interest income 255 323 914 (1,238)
Interest income 9 4 27 16
-----------------------------------------------------------------------------------------------------------------
Net income (loss) before common dividends 264 327 941 (1,222)
Dividends paid to common shareholders -- 14 -- 14
-----------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders $ 264 $ 313 $ 941 $(1,236)
==================================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 297.5 297.5 297.5 297.5
==================================================================================================================
Net income per preferred share, basic and diluted $ 887 $1,052 $3,163 $(4,155)
==================================================================================================================
See accompanying notes to financial statements.
F-84
FSP Royal Ridge Corp.
Statements of Cash Flows
(unaudited)
For the Nine Months Ended
(in thousands) September 30, 2004 September 30, 2003
==================================================================================================================
Cash flows from operating activities:
Net Income (loss) $ 941 $ (1,222)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization 429 367
Amortization of favorable lease 349 310
Changes in operating assets and liabilities:
Restricted cash -- (571)
Tenant rent receivables -- (2)
Step rent receivable (86) (932)
Prepaid expenses and other assets 5 (29)
Accounts payable and accrued expenses 235 469
------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 1,873 (1,610)
------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- (17,873)
Purchase of acquired real estate leases -- (1,118)
Purchase of acquired favorable real estate leases -- (3,333)
------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- (22,324)
------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- 29,760
Syndication costs -- (2,483)
Dividends to stockholders (1,614) (864)
Proceeds from long-term debt -- 24,250
Principal payments on long-term debt -- (24,250)
------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (1,614) 26,413
------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 259 2,479
Cash and cash equivalents, beginning of period 2,251 --
------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,510 $ 2,479
==================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 1,731
Disclosure of non-cash financing activities:
Dividends declared but not paid $ -- $ 525
See accompanying notes to financial statements.
F-85
FSP Royal Ridge Corp.
Notes to Financial Statements
(unaudited)
1. Organization and Basis of Presentation
FSP Royal Ridge Corp. (the "Company") was organized on December 20, 2002 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a six-story Class "A" suburban office building containing approximately 161,366
rental square feet of space located on approximately 13.2 acres of land in
Alpharetta, GA (the "Property). The Company acquired the Property on January 30,
2003.
BASIS OF PRESENTATION
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included.
These financial statements should be read in conjunction with the Company's
financial statements and notes thereto for its fiscal year ended December 31,
2003.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain balances in the 2003 financial statements have been reclassified to
conform to the 2004 presentation.
2. Net Income Per Share
Basic net income per preferred share is computed by dividing net income
attributed to preferred shareholders by the weighted average number of preferred
shares outstanding during the period. Diluted net income per preferred share
reflects the potential dilution that could occur if securities or other
contracts to issue shares were exercised convertible into shares. There were no
potential dilutive shares outstanding at September 30, 2004 and 2003. Subsequent
to the completion of the offering of preferred shares, the holders of common
stock are not entitled to share in any income nor in any related dividend.
3. Income Taxes
The Company has elected to be taxed as a Real Estate Investment Trust ("REIT")
under Sections 856-860 of the Internal Revenue Code of 1986, as amended. In
order to qualify as a REIT, the Company is required to distribute at least 90%
of its taxable income to shareholders and to meet certain asset and income tests
as well as certain other requirements. The Company will generally not be liable
for federal income taxes, provided it satisfies these requirements. Even as a
qualified REIT, the Company is subject to certain state and local taxes on its
income and property.
F-86
FSP Royal Ridge Corp.
Notes to Financial Statements
(unaudited)
4. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. Fees incurred
under the agreement were $9,000 and $9,000 for the three months ended September
30, 2004 and 2003, respectively and $26,000 and $9,000 for the nine months ended
September 30, 2004 and 2003, respectively.
An acquisition fee of $149,000 and other costs of $111,000 were paid in the nine
months ended September 30, 2003 to an affiliate of the common shareholder. Such
fees were included in the cost of the real estate.
Syndication fees of $2,380,000 were paid in the nine months ended September 30,
2003 to an affiliate of the common shareholder for services related to
syndication of the Company's preferred stock.
During the nine months ended September 30, 2003, the Company borrowed and repaid
in full a note payable to FSP, principal of $24,250,000 with interest equal to
the Citizens Bank base rate. Interest paid to FSP was $20,000. The average
interest rate during the time the loan was outstanding was 4.50%.
A commitment fee of $1,711,000 was paid to FSP during the nine months ended
September 30, 2003 for obtaining the first mortgage loan. Such amount is
included in interest expense on the Statement of Operations.
The Company paid a distribution of $14,000 during the nine months ended
September 30, 2003 to the common shareholder relating to operating activities of
the Company prior to the completion of the offering of preferred shares.
5. Subsequent Events
On October 1, 2004 the Company declared a dividend of $1,787.00 per share of
preferred stock payable to holders of record as of October 1, 2004.
F-87
FSP Royal Ridge Corp.
Financial Statements
December 31, 2003
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report.............................................. F-89
Balance Sheet as of December 31, 2003..................................... F-90
Statement of Operations for the year ended December 31, 2003.............. F-91
Statement of Changes in Stockholders' Equity for the year ended
December 31, 2003................................................... F-92
Statement of Cash Flows for the year ended December 31, 2003.............. F-93
Notes to the Financial Statements......................................... F-94
F-88
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Royal Ridge Corp.
We have audited the accompanying balance sheet of FSP Royal Ridge Corp. as of
December 31, 2003, and the related statements of operations, changes in
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Royal Ridge Corp. as of
December 31, 2003, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
January 23, 2004
F-89
FSP Royal Ridge Corp.
Balance Sheet
December 31,
(in thousands, except shares and par value amounts) 2003
======================================================================================================
Assets:
Real estate investments, at cost:
Land $ 1,649
Buildings and improvements 16,224
------------------------------------------------------------------------------------------------------
17,873
Less accumulated depreciation 375
------------------------------------------------------------------------------------------------------
Real estate investments, net 17,498
Acquired real estate leases, net of accumulated amortization of $143 975
Acquired favorable real estate leases, net of accumulated amortization of $426 2,907
Cash and cash equivalents 1,214
Cash-funded reserves 1,037
Restricted cash 571
Step rent receivable 954
Prepaid expenses and other assets 14
------------------------------------------------------------------------------------------------------
Total assets $ 25,170
======================================================================================================
Liabilities and stockholders' equity:
Liabilities:
Accounts payable and accrued expenses $ 240
Distributions payable 536
------------------------------------------------------------------------------------------------------
Total liabilities 776
------------------------------------------------------------------------------------------------------
Commitments and contingencies:
Stockholders' equity:
Preferred stock, $.01 par value, 297.5 shares
authorized, issued and outstanding --
Common stock, $.01 par value, 1 share
authorized, issued and outstanding --
Additional paid-in capital 27,277
Retained deficit and distributions in excess of earnings (2,883)
------------------------------------------------------------------------------------------------------
Total stockholders' equity 24,394
------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 25,170
======================================================================================================
See accompanying notes to financial statements.
F-90
FSP Royal Ridge Corp.
Statement of Operations
For the
Year Ended
(in thousands, except shares and per share amounts) December 31, 2003
================================================================================
Revenue:
Rental $ 2,264
--------------------------------------------------------------------------------
Total revenue 2,264
--------------------------------------------------------------------------------
Expenses:
Rental operating expenses 746
Real estate taxes and insurance 255
Depreciation and amortization 518
Interest 1,731
--------------------------------------------------------------------------------
Total expenses 3,250
--------------------------------------------------------------------------------
Loss before interest income (986)
Interest income 28
--------------------------------------------------------------------------------
Net loss before common dividends (958)
Distributions paid to common stockholder 14
--------------------------------------------------------------------------------
Net loss attributable to preferred shareholders $ (972)
================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 297.5
================================================================================
Net loss per preferred share, basic and diluted $ (3,267)
================================================================================
See accompanying notes to financial statements.
F-91
FSP Royal Ridge Corp.
Statement of Changes in Stockholders' Equity
For the year ended December 31, 2003
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
==========================================================================================================================
Private offering of 297.5 shares, net $ -- $ -- $ 27,277 $ -- $ 27,277
Distributions to stockholders -- -- -- (1,925) (1,925)
Net loss -- -- -- (958) (958)
--------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ -- $ -- $ 27,277 $ (2,883) $ 24,394
==========================================================================================================================
See accompanying notes to financial statements.
F-92
FSP Royal Ridge Corp.
Statement of Cash Flows
For the Year Ended
(in thousands) December 31, 2003
================================================================================
Cash flows from operating activities:
Net loss $ (958)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 518
Amortization of favorable leases 426
Changes in operating assets and liabilities:
Cash-funded reserve (1,037)
Restricted cash (571)
Step rent receivable (954)
Prepaid expenses and other assets (14)
Accounts payable and accrued expenses 240
--------------------------------------------------------------------------------
Net cash used for operating activities (2,350)
--------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (17,873)
Purchase of acquired real estate leases (1,118)
Purchase of acquired favorable real estate leases (3,333)
--------------------------------------------------------------------------------
Net cash used for investing activities (22,324)
--------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock 29,760
Syndication costs (2,483)
Distributions to stockholders (1,389)
Proceeds from long-term debt 24,250
Principal payments on long-term debt (24,250)
--------------------------------------------------------------------------------
Net cash provided by financing activities 25,888
--------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,214
Cash and cash equivalents, beginning of period --
--------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,214
================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 1,731
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 536
See accompanying notes to financial statements.
F-93
FSP Royal Ridge Corp.
Notes to Financial Statements
1. Organization
FSP Royal Ridge Corp. (the "Company") was organized on December 20, 2002 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a six-story Class "A" suburban office building containing approximately 161,366
rental square feet of space located on approximately 13.2 acres of land in
Alpharetta, GA (the "Property). The Company acquired the Property on January 30,
2003.
2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The results of operations from inception to date are not necessarily indicative
of the results to be obtained for other interim periods or for the full fiscal
year.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvements
typically is provided by cash set aside at the time the Property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the asset are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight-line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture & Equipment 5-7
F-94
FSP Royal Ridge Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the Property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheet:
(in thousands)
--------------
Price per Offering Memorandum $ 24,250
Plus: Acquisition fees 149
Plus: Other acquisition costs 111
Less: Closing credit for tenant improvements (3,251)
Less: Closing credit for free rent (1,270)
---------------------------------------------------------
Total Acquisition Costs $ 19,989
=========================================================
These costs are reported in the Company's Balance Sheet as follows:
Land $ 1,649
Building 13,889
Acquired real estate leases 1,118
Acquired favorable real estate leases 3,333
-----------------------------------------------------------
Total reported on Balance Sheet $ 19,989
===========================================================
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At December 31, 2003, no
such indicators of impairment were identified.
ACQUIRED REAL ESTATE LEASES
Acquired real estate leases represent the estimated value of legal and leasing
costs related to acquired leases that were included in the purchase price when
the Company acquired the property. Under SFAS No. 141 "Business Combinations",
which was approved by the Financial Accounting Standards Board ("FASB") in June
2001, the Company is required to segregate these costs from its investment in
real estate. The Company subsequently amortizes these costs on a straight-line
basis over the remaining life of the related leases. Amortization expense of
$143,000 is included in Depreciation and Amortization in the Company's Statement
of Operations for the period ended December 31, 2003.
Acquired real estate lease costs included in the purchase price of the Property
were $1,118,000 and are being amortized over the weighted-average period of
seven years in respect of the leases assumed. Detail of the acquired real estate
leases as of December 31, 2003:
(in thousands)
--------------
Cost $ 1,118
Accumulated amortization (143)
---------
Book value $ 975
=========
The estimated annual amortization expense for the five years succeeding December
31, 2003 are as follows:
(in thousands)
--------------
2004 $ 156
2005 $ 156
2006 $ 156
2007 $ 156
2008 $ 156
F-95
FSP Royal Ridge Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
ACQUIRED FAVORABLE REAL ESTATE LEASES
Acquired favorable real estate leases represent the value related to the leases
when the lease payments due under a tenant's lease exceed the market rate of the
lease at the date the Property was acquired. Under SFAS 141 the Company is
required to report this value separately from its investment in real estate. The
Company subsequently amortizes this amount on a straight-line basis over the
remaining life of the tenant's lease. Amortization of $426,000 is shown as a
reduction of rental income in the Company's Statement of Operations for the
period ended December 31, 2003.
The Acquired favorable real estate leases included in the purchase price of the
property was $3,333,000 and is being amortized over a period of seven years with
respect of the leases assumed. Details of the acquired favorable real estate
leases as of December 31, 2003:
(in thousands)
--------------
Cost $ 3,333
Accumulated amortization (426)
---------
Book value $ 2,907
=========
The estimated annual amortization expense for the five years succeeding December
31, 2003 are as follows:
2004 $ 465
2005 $ 465
2006 $ 465
2007 $ 465
2008 $ 465
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
Property. These funds typically are used for the payment of real estate assets
and deferred leasing commissions; however, there is no legal restriction on
their use and they may be used for any Company purpose.
RESTRICTED CASH
Restricted cash represents funds held in escrow for tenant improvements.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". The Company typically
classifies its debt securities as available-for-sale.
There were no investments in marketable securities at December 31, 2003.
F-96
FSP Royal Ridge Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
For the period ended December 31, 2003 rental income was derived from various
tenants. As such, future receipts are dependent upon the financial strength of
the lessees and their ability to perform under the lease agreements.
The following tenants represent greater than 10% of total revenue:
Axis U.S Insurance 52%
Hagemeyer North America, Inc. 38%
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is $
954,000 at December 31, 2003.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount of
$ 2,483,000 have been reported as a reduction in Stockholders' Equity in the
Company's Balance Sheet.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial properties and accounts for its leases as
operating leases. Rental income from leases, which may include rent concession
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
Period Ended
December 31,
(in thousands) 2003
===============================================
Income from leases $ 1,152
Straight-line rent adjustment 954
Reimbursable expenses 584
Amortization of favorable leases (426)
-----------------------------------------------
Total $ 2,264
===============================================
F-97
FSP Royal Ridge Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
INTEREST INCOME
Interest income is recognized when the related services are performed and the
earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a Real Estate Investment Trust ("REIT")
under the Internal Revenue Code of 1986, as amended. As a REIT, the Company
generally is entitled to a tax deduction for dividends paid to its shareholders,
thereby effectively subjecting the distributed net income of the Company to
taxation at the shareholder level only. The Company must comply with a variety
of restrictions to maintain its status as a REIT. These restrictions include the
type of income it can earn, the type of assets it can hold, the number of
shareholders it can have and the concentration of their ownership, and the
amount of the Company's taxable income that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share. Basic net income
per preferred share is computed by dividing net income by the weighted average
number of preferred shares outstanding during the period. Diluted net income per
preferred share reflects the potential dilution that could occur if securities
or other contracts to issue shares were convertible into shares. There were no
potential dilutive shares outstanding at December 31, 2003. Subsequent to the
completion of the offering of preferred shares, the holders of common stock are
not entitled to share in any income nor in any related dividend.
3. Recent Accounting Standards
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The adoption of
this statement did not have a material effect on the Company's financial
position, results of operations and cash flows.
F-98
FSP Royal Ridge Corp.
Notes to Financial Statements
4. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies these requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2003, the Company incurred a net operating
loss for income tax purposes of approximately $1,349,000 that can be carried
forward until it expires in the year 2023.
At December 31, 2003, the Company's net tax basis of its real estate assets was
$21,822,000.
The following schedule reconciles net income (loss) to taxable income subject to
dividend requirements:
Period Ended
December 31,
(in thousands) 2003
=================================================================
Net loss $ (958)
Add: Book depreciation and amortization 518
Amortization of favorable real estate leases 426
Deferred rent 99
Less: Tax depreciation and amortization (480)
Straight-line rents (954)
-----------------------------------------------------------------
Taxable loss(1) $ (1,349)
=================================================================
(1) A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash distributions paid to the dividends paid
deduction:
Period Ended
December 31,
Per Preferred Per Common
(in thousands, except per share data) Total Share Share
========================================================================
Cash dividends paid $ 1,389 $ 4,623 $ 14,232
Less: Return of Capital (1,389) (4,623) (14,232)
------------------------------------------------------------------------
Dividends paid deduction $ -- $ -- $ --
========================================================================
F-99
FSP Royal Ridge Corp.
Notes to Financial Statements
5. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all dividends, if any, declared by the Board of Directors out of funds
legally available. The right to receive dividends shall be non-cumulative, and
no right to dividends shall accrue by reason of the fact that no dividend has
been declared in any prior year. Each holder of Shares will be entitled to
receive, to the extent that funds are available therefore, $100,000 per Share,
before any payment to the holder of Common Stock, out of distributions to
stockholders upon liquidation, dissolution or the winding up of the Company; the
balance of any such funds available for distribution will be distributed among
the holders of Shares and the holder of Common Stock, pro rata based on the
number of shares held by each; provided, however, that for these purposes, one
share of Common Stock will be deemed to equal one-tenth of a share of Preferred
Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to share in any earnings nor any related
dividend.
6. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the period
ended December 31, 2003, fees incurred under the agreement were $17,605.
An acquisition fee of $149,000 and other costs of $111,000 were paid in 2003 to
an affiliate of the Common Shareholder. Such fees were included in the cost of
the real estate.
Syndication fees of $2,380,000 were paid in 2003 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2003, the Company borrowed and repaid in full a note payable to FSP,
principal of $24,250,000, with interest equal to the Citizens Bank base rate.
Interest paid to FSP was $20,000. The average interest rate during the time the
loan was outstanding was 4.50%.
A commitment fee of $1,711,000 was paid to FSP for obtaining the first mortgage
loan. Such amount is included in interest expense on the Statement of
Operations.
The Company paid a distribution of $14,000 to the common shareholder relating to
operating activities of the Company prior to the completion of the offering of
preferred shares.
F-100
FSP Royal Ridge Corp.
Notes to Financial Statements
7. Commitments and Contingencies
The Company, as lessor, has minimum future rentals due under non-cancelable
operating leases as follows:
Year Ending
(in thousands) December 31, Amount
------------ ---------
2004 $ 2,198
2005 2,040
2006 2,071
2007 2,123
2008 2,176
Thereafter 6,750
---------
$ 17,358
=========
In addition, the lessees are liable for real estate taxes and certain operating
expenses of the Property.
Upon acquiring the commercial rental property in January 2003, the Company was
assigned the lease agreements between the seller of the Property and the
existing tenants. The original lease periods range from two to ten years with
renewal options.
F-101
SCHEDULE III
ROYAL RIDGE
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2003
Initial Cost
---------------------------------
Costs
Capitalized
Buildings (Disposals)
Improvements Subsequent
and to
Description Encumbrances (1) Land Equipment Acquisition
---------------- ---- --------- ------------
(in thousands)
Royal Ridge, Alpharetta, GA 1,649 16,224 --
Historical Costs
--------------------------------------------------------------------------------------
Buildings Total Costs,
Improvements Net of Depreciable
and Accumulated Accumulated Life Date of
Description Land Equipment Total (2) Depreciation Depreciation Years Acquisition
---- --------- --------- ------------ ------------ ----- -----------
(in thousands)
Royal Ridge, Alpharetta, GA 1,649 16,224 17,873 375 17,498 5-39 2003
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is $21,822.
F-102
Royal Ridge
The following table summarizes the changes in the Company's real estate
investments and accumulated depreciation:
December 31,
---------------
(in thousands) 2003
==========================================================================
Real estate investments, at cost:
Balance, beginning of period $ --
Acquisitions 17,873
Improvements --
Dispositions --
--------------------------------------------------------------------------
Balance, end of period $17,873
==========================================================================
Accumulated depreciation:
Balance, beginning of period $ --
Depreciation 375
Dispositions --
--------------------------------------------------------------------------
Balance, end of period $ 374
==========================================================================
F-103
ROYAL RIDGE
FOR THE PERIOD JANUARY 1, 2003 TO JANUARY 29, 2003 AND
FOR THE YEAR ENDED DECEMBER 31, 2002
CONTENTS
PAGE
Independent auditors' report F-105
Statements of revenue over certain operating expenses F-106
Notes accompanying the statements of revenue over certain
operating expenses F-107
F-104
INDEPENDENT AUDITORS' REPORT
To the Stockholders
FSP Royal Ridge Corp.
We have audited the accompanying statements of revenue over certain operating
expenses (the "Statements") of Royal Ridge for the period January 1, 2003 to
January 29, 2003 and for the year ended December 31, 2002. These Statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these Statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the Statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the Statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall Statements'
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying Statements were prepared to comply with the requirements of
Rule 3-14 of Regulation S-X of the Securities and Exchange Commission, and
exclude certain expenses described in Note 2 and, therefore, are not intended to
be a complete presentation of the Property's revenue and expenses.
In our opinion, these Statements referred to above present fairly, in all
material respects, the revenue over certain operating expenses (as described in
Note 2) of Royal Ridge for the period January 1, 2003 to January 29, 2003 and
for the year ended December 31, 2002, in conformity with the basis of accounting
described in Note 2.
/s/ Braver and Company, P.C.
Newton, Massachusetts
February 28, 2004
F-105
ROYAL RIDGE
STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
FOR THE PERIOD JANUARY 1, 2003 TO JANUARY 29, 2003 AND
FOR THE YEAR ENDED DECEMBER 31, 2002
2003 2002
--------- ---------
REVENUE:
Rental income $ 1,195 $ 3,084
--------- ---------
CERTAIN OPERATING EXPENSES (Note 2):
Taxes and insurance 19,046 184,096
Management fees 2,652 33,212
Administrative 4,736 62,264
Operating and maintenance 87,616 526,358
--------- ---------
114,050 805,930
--------- ---------
Excess of certain operating expenses over revenue $(112,855) $(802,846)
========= =========
The accompanying notes are an integral part of these financial statements.
F-106
ROYAL RIDGE
NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
1. DESCRIPTION OF THE PROPERTY:
The accompanying statements of revenue over certain operating expenses
(the "Statements") include the operations of a commercial building located
in Alpharetta, Georgia (the "Property"). These Statements are the results
of operations of the Property under the basis of accounting described in
Note 2 for the period and year described prior to the acquisition of the
Property by FSP Royal Ridge Corp. The Property consists of a six-story
Class "A" institutional quality suburban office tower containing
approximately 161,366 square feet located on approximately 13.2 acres of
land. The Property was sold to FSP Royal Ridge Corp. on January 30, 2003.
No financial information is provided for 2001. The property was
constructed in 2001 and there were no leases or tenants until 2002.
2. BASIS OF ACCOUNTING:
The accompanying Statements have been prepared on the accrual basis of
accounting. The Statements have been prepared in accordance with Rule 3-14
of Regulation S-X of the Securities and Exchange Commission for real
estate properties acquired or to be acquired. Accordingly, these
Statements exclude certain historical expenses not comparable to the
operations of the Property after acquisition such as amortization,
depreciation, interest, corporate expenses and certain other costs not
directly related to future operations of the Property.
3. REVENUE RECOGNITION:
Rental revenue includes income from leases, certain reimbursable expenses,
and other income associated with renting the property. A summary of rental
revenue is shown in the following table:
For the period Year Ended
January 1, 2003 to December 31,
January 29, 2003 2002
--------------- ---------------
Reimbursable expenses $ -- $ 3,084
Other income 1,195 --
--------------- ---------------
Total $ 1,195 $ 3,084
=============== ===============
Royal Ridge has retained substantially all of the risks and benefits of
the Property and accounts for its leases as operating leases. Rental
income from leases, which includes rent concessions (including free rent
and tenant improvement allowances) and scheduled increases in rental rates
during the lease term, is recognized on a straight-line basis. However,
for the year ended December 31, 2002 and for the period January 1, 2003 to
January 29, 2003, Royal Ridge did not recognize any rental revenue due to
a "free rent" provision in its lease agreements. Had Royal Ridge
recognized the rental revenue under a straight-line basis, such revenue
would have been written off as uncollectible upon the sale of the Property
as described in Note 1. The Company does not have any percentage rent
arrangements with its tenants. Reimbursable costs are included in rental
income in the period earned.
4. USE OF ESTIMATES:
The preparation of the Statements in conformity with the basis of
accounting described in Note 2 requires management to make estimates and
assumptions that affect the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
F-107
ROYAL RIDGE
NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
5. CONCENTRATIONS OF RISKS:
For the period January 1, 2003 to January 29, 2003, and for the year ended
December 31, 2002, rental income was received from three lessees. As such,
future receipts are dependent upon the financial strength of these lessees
and their ability to perform under the lease agreements
6. LEASES:
The Company, as lessor, has minimum future rentals due under
noncancellable operating leases as follows:
Year Ending
December 31, Amount
------------ -------------
2003 $ 1,153,000
2004 2,198,000
2005 2,040,000
2006 2,071,000
2007 2,123,000
Thereafter 8,926,000
-------------
$ 18,511,000
=============
In addition, the lessees are liable for real estate taxes and operating
expenses as direct expenses to them.
F-108
SELECTED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma financial information has been prepared
based upon certain pro forma adjustments to the historical consolidated
financial statements of FSP Corp. and the target REITs. The pro forma
consolidated balance sheets have been presented as if the mergers occurred as of
September 30, 2004. The pro forma consolidated statements of income for the nine
months ended September 30, 2004 and for the year ended December 31, 2003 and the
consolidated pro forma statements of cash flow for the nine months ended
September 30, 2004 and for the year ended December 31, 2003 are presented as if
the mergers occurred at the beginning of the period presented.
The pro forma financial information has been prepared assuming all of the
target REITs participate in the mergers. If one or more target REITs does not
obtain the vote required for the consummation of the merger with such target
REIT, FSP Corp. will not proceed with the mergers of any other target REIT.
The unaudited pro forma consolidated financial statement data are not
necessarily indicative of what the combined company's actual financial position
or results of operations would have been as of the date or for the period
indicated, nor do they purport to represent the combined company's financial
position or results of operations as of or for any future period. The unaudited
pro forma consolidated financial statement data should be read in conjunction
with all financial statements included elsewhere herein or incorporated herein
by reference.
F-109
Franklin Street Properties Corp.
Combining Condensed Consolidated Pro Forma Balance Sheets
September 30, 2004
(Unaudited)
Historical Historial Pro Forma
(in thousands) FSP Corp. Target REITs(k) Adjustment Pro Forma
-------------------------------------------------------------------------------------------------------
Assets:
Real estate assets, net $ 442,197 $ 122,561 $ 14,064(c)(d) $ 578,822
Acquired favorable leases, net -- 8,814 232(d) 9,046
Acquired lease origination costs, net 6,346 3,853 236(d) 10,435
Investment in non-consolidated REITs 4,292 -- -- 4,292
Cash and cash equivalents 50,630 16,269 (685)(c) 65,739
(475)(b)
Restricted cash 1,039 706 -- 1,745
Tenant rents receivable, net 552 36 -- 588
Straight line rents receivable, net 4,980 2,560 (2,560)(p) 4,980
Prepaid expenses 3,475 181 -- 3,656
Deferred leasing commissions, net 1,293 358 -- 1,651
Office computeres and equipment, net 408 -- -- 408
-------------------------------------------------------------------------------------------------------
Total assets $ 515,212 $ 155,338 $ 10,812 $ 681,362
=======================================================================================================
Liabilities and stockholders' equity:
Liabilities:
Accounts payable and accrued expenses $ 8,574 $ 3,897 $ -- $ 12,471
Accrued compensation 1,050 -- -- 1,050
Distribution payable -- -- 6,021(o) 6,021
Tenant security deposits 1,039 135 1,174
-------------------------------------------------------------------------------------------------------
Total liabilities 10,663 4,032 6,021 20,716
-------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock -- -- -- --
Common stock 5 -- 1(i) 6
Additional paid in capital 512,813 167,412 (11,316)(i) 668,909
Treasury stock (10) -- -- (10)
Retained earnings (distributions in
excess of earnings) (8,259) (16,106) 16,106(q) (8,259)
-------------------------------------------------------------------------------------------------------
Total stockholders' equity 504,549 151,306 4,791 660,646
-------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $ 515,212 $ 155,338 $ 10,812 $ 681,362
=======================================================================================================
See accompanying notes to condensed consolidated pro forma financial
statements
F-110
Franklin Street Properties Corp.
Combining Condensed Consolidated Pro Forma Statements of Income
For the nine months ended
September 30, 2004
(Unaudited)
Historical Historical Pro Forma
(in thousands, except per share amounts) FSP Corp. Target REITs(l) Adjustments Pro Forma
-------------------------------------------------------------------------------------------------------
Revenue:
Rental income $ 51,411 $ 16,975 $ 45(d) $ 68,431
Syndication fees 8,603 -- -- 8,603
Transaction fees 9,209 -- -- 9,209
Sponsored REIT income 2,357 -- -- 2,357
Management fees and interest from loans 803 -- (175)(e) 628
Equity in earnings of investment in REIT 182 -- -- 182
Other 13 -- -- 13
-------------------------------------------------------------------------------------------------------
Total revenue 72,578 16,975 (130) 89,423
=======================================================================================================
Expenses:
Rental operating expenses 10,267 3,917 (175)(e) 14,009
Real estate taxes and insurance 6,702 2,220 -- 8,922
Depreciation and amortization 9,984 2,819 304(d) 13,133
26(d)
Sponsored REIT expenses 1,693 -- -- 1,693
Selling, general and administrative 4,920 -- 475(b) 5,395
Commissions 4,384 -- -- 4,384
Interest 517 -- -- 517
-------------------------------------------------------------------------------------------------------
Total expenses 38,467 8,956 630 48,053
-------------------------------------------------------------------------------------------------------
Income (loss) before interest, taxes and 34,111 8,019 (760) 41,370
discontinued operations,
Interest income 489 179 -- 668
Taxes on income (a) (760) -- -- (760)
Income from discontinued operations -- -- -- --
-------------------------------------------------------------------------------------------------------
Net income $ 33,840 $ 8,198 $ (760) $ 41,278
=======================================================================================================
Weighted average shares outstanding 49,628 -- 10,895(i) 60,523
basic and diluted
=======================================================================================================
Net income per share basic and diluted $ 0.68 $ -- $ -- $ 0.68
=======================================================================================================
See accompanying notes to condensed consolidated pro forma financial statements.
F-111
Franklin Street Properties Corp.
Combining Condensed Consolidated Pro Forma Statements of Income
For the year ended
December 31, 2003
(Unaudited)
2003
Merger
Pro Forma Historical Historical
Historical Adjustment Adjusted Target REITs Property Pro Forma
(in thousands, except per share amounts) FSP Corp. (j) FSP Corp. (m) (n) Adjustments Pro Forma
-----------------------------------------------------------------------------------------------------------------------------------
Revenue:
Rental income $ 49,789 $15,204 $ 64,993 $ 20,135 $1,348 $ 61(d) $ 86,537
Syndication fees 14,631 -- 14,631 -- -- (5,403)(g) 9,228
Transaction fees 14,745 -- 14,745 -- -- (5,558(g) 9,187
Sponsored REIT income 3,452 -- 3,452 -- -- (1,595(h) 1,857
Management fees and interest on 1,129 -- 1,129 -- -- (204)(e) 652
(273)(f)
Other 22 -- 22 -- -- 22
-----------------------------------------------------------------------------------------------------------------------------------
Total revenue 83,768 15,204 98,972 20,135 1,348 (12,972) 107,483
-----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 10,425 3,997 14,422 4,242 415 (204)(e) 18,875
Real estate taxes and insurance 6,264 2,667 8,931 2,708 175 -- 11,814
Depreciation and amortization 9,265 3,298 12,563 3,463 -- 405(d) 16,466
35(d)
Sponsored REIT expenses 2,620 -- 2,620 -- -- (1,208)(h) 1,412
Selling, general and administrative 5,711 -- 5,711 -- -- 475(b) 6,186
Commissions 7,291 -- 7,291 -- -- -- 7,291
Interest 1,036 -- 1,036 5,175 -- (273)(f) 772
(264)(g)
(4,902)(g)
-----------------------------------------------------------------------------------------------------------------------------------
Total expenses 42,612 9,962 52,574 15,588 590 (5,936) 62,816
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before interest, taxes,
discontinued operations and gain
on sales of properties 41,156 5,242 46,398 4,547 758 (7,036) 44,667
Interest Income 367 117 484 193 -- -- 677
Taxes on income (a) (1,700) -- (1,700) -- -- -- (1,700)
Income from discontinued operations 195 -- 195 -- -- -- 195
Gain on sale of properties,
net of tax 6,362 -- 6,362 -- -- -- 6,362
Dividends to common shareholder -- -- -- (387) -- 387(h) --
-----------------------------------------------------------------------------------------------------------------------------------
Net income $ 46,380 $ 5,359 $ 51,739 $ 4,353 $ 58 $ (6,649) 50,201
===================================================================================================================================
Weighted average shares outstanding,
basic and diluted 39,214 10,416 49,630 -- -- 10,895(i) 60,525
===================================================================================================================================
Income per share attributable to:
Continuing operations $ 1.02 $ -- $ -- $ -- $ -- $ -- $ 0.72
Discontinued operations -- -- -- -- -- -- --
Gain on sale of properties, net $ 0.16 -- -- -- -- -- $ 0.11
-----------------------------------------------------------------------------------------------------------------------------------
Basic and diluted net income per share $ 1.18 $ -- $ -- $ -- $ -- $ -- $ 0.83
===================================================================================================================================
See accompanying notes to condensed consolidated pro forma financial statements
F-112
Franklin Street Properties Corp.
Consolidated Pro Forma Statements of Cash Flow
For the nine months ended
September 30, 2004
(Unaudited)
Historical Historical Pro Forma
(in thousands) FSP Corp. Target REITs (r) Adjustments Pro Forma
-------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 33,840 $ 8,198 $ (760) $ 41,278
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense 9,984 2,819 330(d) 13,133
Amortization of above market lease 176 1,934 (45)(d) 2,065
Equity in earnings from non-consolidated REITs (182) -- -- (182)
Distributions from non-consolidated REITs 147 -- -- 147
Shares issued as compensation 162 -- -- 162
Changes in operating assets and liabilities:
Restricted cash (57) 15 -- (42)
Tenant rent receivables, net 329 14 -- 343
Straight-line rents, net (893) (514) -- (1,407)
Prepaid expenses and other assets, net (2,669) (59) -- (2,728)
Accounts payable and accrued expenses 3,534 (276) -- 3,258
Accrued compensation (485) -- -- (485)
Tenant security deposits 57 (15) -- 42
Payment of deferred leasing commissions (548) (329) -- (877)
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 43,395 11,787 (475) 54,707
-------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets and related leases,
office computers and furniture, capitalized merger costs (993) (225) (685)(c) (1,903)
Investment in non-consolidated REITs (4,257) -- -- (4,257)
Sale of assets held for syndication 4,117 -- -- 4,117
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (1,133) (225) (685) (2,043)
-------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to stockholders (46,152) (12,170) -- (58,322)
Proceeds from (payments to) bank note payable, net (4,117) -- -- (4,117)
Purchase of treasury stock (156) -- -- (156)
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (50,425) (12,170) -- (62,595)
-------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (8,163) (608) (1,160) (9,931)
Cash and cash equivalents, beginning of period 58,793 16,877 -- 75,670
-------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 50,630 $16,269 $ (1,160) $ 65,739
===============================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 517 $ -- $ -- $ 517
Income taxes $ 1,450 $ -- $ -- $ 1,450
Non-cash investing and financing activities:
Assets acquired through issuance of common stock in merger
transaction, net $ -- $ -- $ 149,075 $ 149,075
See accompanying notes to condensed consolidated pro forma financial statements.
F-113
Franklin Street Properties Corp
Consolidated Pro Forma Statements of Cash Flow
For the year ended
December 31, 2003
(Unaudited)
2003 Merger Historical
Historical Pro Forma Adjusted Target Historical Pro Forma
(in thousands) FSP Corp. Adjustment FSP Corp. REITs (s) Property Adjustments Pro forma
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 46,380 $5,359 $ 51,739 $ 4,740 $758 $ (6,649) $ 50,588
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization expense 9,530 3,298 12,828 3,463 -- 440(d) 16,731
Amortization of above market lease 138 -- 138 2,381 -- (61)(d) 2,458
Gain on sale of real estate assets (6,362) -- (6,362) -- -- -- (6,362)
Changes in operating assets and liabilities:
Restricted cash (1) -- (1) (677) -- -- (678)
Tenant rent receivables, net (302) -- (302) (50) -- -- (352)
Straight-line rents, net (1,030) -- (1,030) (1,817) -- -- (2,847)
Prepaid expenses and other assets, net 305 -- 305 (2,729) -- -- (2,424)
Accounts payable and accrued expenses (9,053) -- (9,053) 2,255 -- -- (6,798)
Accrued compensation 258 -- 258 -- -- -- 258
Tenant security deposits 1 -- 1 106 -- -- 107
Payment of deferred leasing commissions (487) -- (487) (39) -- -- (526)
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating
activities 39,377 8,657 48,034 7,633 758 (6,270) 50,155
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Cash acquired through issuance of common
stock in merger transaction 23,524 -- 23,524 -- -- -- 23,524
Purchase of real estate assets and
related leases, office computers and
furniture capitalized merger costs (2,388) -- (2,388) (68,361) -- (685)(c) (71,434)
Change in deposits on real estate assets 841 -- 841 -- -- -- 841
Investment in assets held for syndication (4,117) -- (4,117) -- -- -- (4,117)
Proceeds received on sales of real
estate assets 21,870 -- 21,870 -- -- -- 21,870
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing
activities 39,730 -- 39,730 (68,361) -- (685) (29,316)
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- -- -- 78,377 -- -- 78,377
Distributions to stockholders (46,747) -- (46,747) (12,216) -- -- (58,963)
Proceeds from (payments to) bank note
payable, net 4,117 -- 4,117 -- -- -- 4,117
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for)
financing activities (42,630) -- (42,630) 66,161 -- -- 23,531
-----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 36,477 8,657 45,134 5,433 758 (6,955) 44,370
Cash and cash equivalents, beginning of year 22,316 -- 22,316 3,640 -- -- 25,956
-----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 58,793 $8,657 $ 67,450 $ 9,073 $758 $ (6,955) $ 70,326
===================================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 1,036 $ -- $ 1,036 $ 5,175 $ -- $ -- $ 6,211
Income taxes $ 1,963 $ -- 1,963 $ -- $ -- $ -- $ 1,963
Non-cash investing and financing activities:
Dividends declared but not paid $ -- $ -- -- $ 4,092 $ -- $ -- $ 4,092
Assets acquired through issuance of
common stock in merger transaction, net $ 297,468 $ -- $ 297,468 $ -- $ -- $ 149,075 $ 446,543
See accompanying notes to condensed consolidated pro forma financial statements.
F-114
FRANKLIN STREET PROPERTIES CORP.
NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
BASIS OF PRESENTATION
The following unaudited pro forma condensed consolidated financial
statement presentation has been prepared based upon certain pro forma
adjustments to the historical consolidated financial statements of FSP Corp. The
pro forma balance sheets are presented as if the mergers occurred as of
September 30, 2004. The pro forma statements of income and the pro forma
statements of cash flow are presented as if the mergers occurred as of the
beginning of the periods presented.
The mergers will be treated as a purchase of assets and each target REIT's
assets and liabilities will be recorded on FSP Corp.'s books at their fair value
as of the effective date of the mergers. The value ascribed to the net assets of
the target REITs is estimated to be $156,424,000, which includes real estate
assets of $149,075,000 at their appraised values, cash of $6,664,000 and
capitalized merger costs of $685,000. Other assets, net of liabilities, are
expected to be immaterial. FSP Corp. will record the mergers based upon the fair
value of the assets acquired, not the value of the shares of FSP Corp.'s common
stock issued. The value allocated to the assets acquired in the mergers is
preliminary: the final value allocated to the assets acquired will be determined
as of the actual merger date.
PRO FORMA ADJUSTMENTS
Certain assumptions regarding the operations of FSP Corp. have been made
in connection with the preparation of the pro forma condensed consolidated
financial information. These assumptions are as follows:
(a) FSP Corp. and each of the target REITs have elected to be, and are
qualified as, a real estate investment trust for federal income tax
purposes. Each entity has met the various required tests; therefore,
no provision for federal or state income taxes has been reflected on
real estate operations.
FSP Corp. has subsidiaries which are not in the business of real
estate operations. Those subsidiaries are taxable as real estate
investment trust subsidiaries, or TRS, and are subject to income
taxes at statutory tax rates. The taxes on income shown in the pro
forma statements of income are the taxes on income of the TRS. There
are no material items that would cause a deferred tax asset or a
deferred tax liability.
(b) Costs of the mergers to the target REITs are estimated at $475,000
and are reflected as paid at September 30, 2004, and are recorded as
an administrative expense.
(c) The costs of the mergers to FSP Corp. are estimated at $685,000 and
are reflected as paid as of September 30, 2004 and are capitalized
to the assets acquired.
(d) The following schedule shows the cost of the property (at its
appraised value) plus capitalized merger costs for each target REIT.
(in thousands) Montague Addison Royal Ridge Collins Total
----------------------------------------------------------------------------------------------
Purchase price of properties
Appraised value $ 20,000 $ 54,500 $ 26,075 $ 48,500 $149,075
Capitalized merger costs 125 239 112 209 685
----------------------------------------------------------------------------------------------
Total $ 20,125 $ 54,739 $ 26,187 $ 48,709 $149,760
==============================================================================================
F-115
FRANKLIN STREET PROPERTIES CORP.
NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
The cost of the property held by each target REIT (including
capitalized merger costs of $685,000) has been allocated to real
estate assets, acquired lease origination costs and acquired
favorable leases. Acquired lease origination costs represent the
value associated with acquiring an in-place lease (i.e. the market
cost to execute a similar lease, including leasing commission,
legal, vacancy and other related costs). Acquired favorable leases
represents the value associated with a lease which has a rental
stream with above market rates. The value assigned to buildings,
land and leases approximates their fair value.
The following schedule shows the difference between historical costs
of the properties and their allocated purchase price. The purchase
price of the properties is determined based upon the fair value of
the assets acquired. Depreciation and amortization for the target
REITs is based on a preliminary allocation of the purchase price to
real estate investments and to the leases acquired. The allocation
is subject to change as additional information is obtained. An
increase in the allocation to lease origination costs will result in
an increase in amortization expense. For each $1,000,000 increase in
lease origination costs, the related pro forma amortization expense
will increase by approximately $200,000 per year.
Adjustment to
Depreciation and Amortization
Estimated for the for the
Historical Allocated Life Nine months ended Year ended
Cost Purchase Price Difference (years) September 30, 2004 December 31, 2003
---------- -------------- ---------- ------- ------------------ -----------------
Montague
Land $ 10,500 7,878 $ (2,622) N/A $ -- $ --
Building 9,939 10,202 263 39 5 7
Acquired favorable leases 2,616 1,874 (742) 3 (185) (247)
Acquired lease origination costs 241 171 (70) 3 (17) (23)
-------- -------- -------- -------- --------
Total $ 23,296 $ 20,125 $ (3,171) $ (197) $ (263)
======== ======== ======== ======== ========
Addison Circle
Land $ 4,365 $ 4,140 $ (225) N/A $ -- $ --
Building 43,706 49,499 5,793 39 112 149
Acquired favorable leases -- -- -- - -- --
Acquired lease origination costs 1,150 1,100 (50) 4 (9) (12)
-------- -------- -------- -------- --------
Total $ 49,221 $ 54,739 $ 5,518 $ 103 $ 137
======== ======== ======== ======== ========
Royal Ridge
Land $ 1,649 $ 2,542 $ 893 N/A $ -- $ --
Building 15,537 19,303 3,766 39 73 97
Acquired favorable leases 2,558 3,251 693 6 87 116
Acquired lease origination costs 858 1,091 233 6 29 39
-------- -------- -------- -------- --------
Total $ 20,602 $ 26,187 $ 5,585 $ 189 $ 252
======== ======== ======== ======== ========
Collins Crossing
Land $ 4,022 $ 4,308 $ 286 N/A $ -- $ --
Building 32,843 38,753 5,910 39 114 152
Acquired favorable leases 3,640 3,921 281 4 53 70
Acquired lease origination costs 1,604 1,727 123 4 23 31
-------- -------- -------- -------- --------
Total $ 42,109 $ 48,709 $ 6,600 $ 190 $ 253
======== ======== ======== ======== ========
Total
Land $ 20,536 $ 18,868 $ (1,668) N/A $ -- $ --
Building 102,025 117,757 15,732 39 304 405
-------- -------- -------- -------- --------
Real estate assets, net 122,561 136,625 14,064 304 405
Acquired favorable leases 8,814 9,046 232 3-6 (45) (61)
Acquired lease origination costs 3,853 4,089 236 3-6 26 35
-------- -------- -------- -------- --------
Total $135,228 $149,760 $ 14,532 $ 285 $ 379
======== ======== ======== ======== ========
F-116
FRANKLIN STREET PROPERTIES CORP.
NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
(e) Management fees charged by FSP Corp. to the target REITs have been
eliminated from revenue and expenses as follows.
Nine Months Ended Year Ended
September 30, 2004 December 31, 2003
--------------------------------------------------------
$ 175,000 $ 204,000
(f) Interest of $273,000 charged by FSP Corp. on loans to the two target
REITs syndicated in 2003 has been eliminated from revenue and
expenses. See footnote (g) for additional interest expense incurred
during syndications.
(g) Income and expenses directly related to the syndication of two
target REITs in 2003 have been eliminated in the pro forma
Statements of Income.
Revenue directly related to the syndication of two target REITs in
2003 that is included in FSP Corp.'s financial statements as
follows:
Loan origination fees $ 4,902,000
Other organization costs 656,000
------------
Total transaction fees $ 5,558,000
Syndication fees, gross 6,820,000
Syndication fees, rebates (1,417,000)
------------
Total syndication fees, net 5,403,000
------------
Total revenue adjustment $10,961,000
============
F-117
FRANKLIN STREET PROPERTIES CORP.
NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
The two target REITs have accounted for these fees in their
financial statements as follows:
Interest expense $4,902,000
Real estate acquisition costs 656,000
----------
$5,558,000
==========
Gross syndication fees recorded as an
offset to additional paid-in capital $6,820,000
==========
In connection with the syndication of the two target REITs in 2003,
FSP Corp. incurred direct expenses of $264,000 relating to interest
expense that is eliminated in the pro forma statement of income.
(h) After a sponsored REIT purchases a real estate asset but prior to
the final syndication of the sponsored REIT, FSP Corp. records its
pro rata share of the operations of the sponsored REIT into FSP
Corp.'s statement of operations as sponsored REIT income and
sponsored REIT expenses. Subsequent to the syndication, the
sponsored REIT typically declares and pays a dividend to FSP Corp.
This adjustment eliminates duplicate revenues and expenses prior to
the syndication of the target REITs. A summary of the adjustment is
shown below:
Nine Months Ended Year Ended
(in thousands) September 30, 2004 December 31, 2003
-------------------------------------------------------------------------
Sponsored REIT income $ -- $ 1,595
Sponsored REIT expenses -- 1,208
--------- ---------
Dividends to common shareholder $ -- $ 387
========= =========
(i) Approximately 10,894,994 shares of FSP common stock will be issued
in exchange for the 1,822.5 outstanding shares of target REIT
preferred stock in connection with the mergers. Stockholders' equity
will be adjusted by the net difference between the assets and
liabilities acquired in the merger.
(j) Represents the revenue and expenses of the 13 Sponsored REITs
acquired by FSP Corp. from January 1, 2003 to May 31, 2003.
For the period
(unaudited) January 1, 2003
(in thousands) to May 31, 2003
--------------------
Revenue $ 15,204
Real estate operating expenses (3,997)
Real estate taxes and insurance (2,667)
Depreciation and amortization (3,298)
Interest income 117
----------
Net income $ 5,359
==========
F-118
(k) The following table combines the historical balance sheets of the
target REITs as of September 30, 2004.
(in thousands)
Montague Addison Circle Royal Ridge Collins Crossing Total
-------- -------------- ----------- ---------------- -----
Assets:
Land $ 10,500 $ 4,365 $ 1,649 $ 4,022 $ 20,536
Building 10,499 46,112 16,224 34,232 107,067
--------- --------- --------- --------- ---------
Real estate investments, cost 20,999 50,477 17,873 38,254 127,603
Less accumulated depreciation 560 2,406 687 1,389 5,042
--------- --------- --------- --------- ---------
Real estate investments, net 20,439 48,071 17,186 36,865 122,561
Acquired favorable leases, net 2,616 -- 2,558 3,640 8,814
Acquired lease origination costs, net 241 1,150 858 1,604 3,853
Cash and equivalents 3,633 5,492 2,510 4,634 16,269
Restricted cash -- 20 571 115 706
Tenant rent receivable, net -- 1 -- 35 36
Step rent receivable, net 461 531 1,040 528 2,560
Prepaid expenses 22 99 9 51 181
Deferred leasing commissions, net -- 358 -- -- 358
--------- --------- --------- --------- ---------
Total assets $ 27,412 $ 55,722 $ 24,732 $ 47,472 $ 155,338
========= ========= ========= ========= =========
Liabilities and stockholders' Equity:
Accounts payable and accrued expenses $ 465 $ 1,694 $ 475 $ 1,263 $ 3,897
Tenant security deposits -- 20 -- 115 135
--------- --------- --------- --------- ---------
Total liabilities 465 1,714 475 1,378 4,032
--------- --------- --------- --------- ---------
Stockholders' equity
Preferred stock -- -- -- -- --
Common stock -- -- -- -- --
Additional paid in capital 30,652 58,383 27,277 51,100 167,412
Retained deficit and distributions in excess
of earnings (3,705) (4,375) (3,020) (5,006) (16,106)
--------- --------- --------- --------- ---------
Total stockholders' equity 26,947 54,008 24,257 46,094 151,306
--------- --------- --------- --------- ---------
Total liabilities & stockholders' equity $ 27,412 $ 55,722 $ 24,732 $ 47,472 $ 155,338
========= ========= ========= ========= =========
F-119
FRANKLIN STREET PROPERTIES CORP.
NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
(l) The following table combines the historical operations for the
target REITs for the nine months ended September 30, 2004.
(in thousands)
Montague Addison Circle Royal Ridge Collins Crossing Total
-------- -------------- ----------- ---------------- -----
Revenue:
Rental $ 2,592 $ 6,892 $ 2,286 $ 5,205 $ 16,975
---------- ---------- ---------- ---------- ----------
Total revenue 2,592 6,892 2,286 5,205 16,975
---------- ---------- ---------- ---------- ----------
Expenses:
Rental operating expenses 273 1,490 693 1,461 3,917
Real estate taxes and insurance 210 1,045 250 715 2,220
Depreciation and amortization 282 1,136 429 972 2,819
---------- ---------- ---------- ---------- ----------
Total expenses 765 3,671 1,372 3,148 8,956
---------- ---------- ---------- ---------- ----------
Income before interest 1,827 3,221 914 2,057 8,019
Interest income 34 67 27 51 179
---------- ---------- ---------- ---------- ----------
Net income $ 1,861 $ 3,288 $ 941 $ 2,108 $ 8,198
========== ========== ========== ========== ==========
(m) The following table combines the historical operations of the target
REITs for the periods ended December 31, 2003.
For the Period
For the Year Ended January 30, 2003 to March 13, 2003 to
December 31, 2003 December 31, 2003 December 31, 2003
-------------------------- ----------------- -----------------
(in thousands)
Montague Addison Circle Royal Ridge Collins Crossing Total
-------- -------------- ----------- ---------------- -----
Revenue:
Rental $ 3,645 $ 8,554 $ 2,264 $ 5,672 $ 20,135
---------- ---------- ---------- ---------- ----------
Total revenue 3,645 8,554 2,264 5,672 20,135
---------- ---------- ---------- ---------- ----------
Expenses:
Rental operating expenses 314 1,783 746 1,399 4,242
Real estate taxes and insurance 339 1,354 255 760 2,708
Depreciation and amortization 368 1,497 518 1,080 3,463
Interest -- -- 1,731 3,444 5,175
---------- ---------- ---------- ---------- ----------
Total expenses 1,021 4,634 3,250 6,683 15,588
---------- ---------- ---------- ---------- ----------
Income (loss) before interest 2,624 3,920 (986) (1,011) 4,547
Interest income 45 85 28 35 193
Dividends to common shareholders -- -- (14) (373) (387)
---------- ---------- ---------- ---------- ----------
Net income (loss) attributable to
preferred shareholders $ 2,669 $ 4,005 $ (972) $ (1,349) $ 4,353
========== ========== ========== ========== ==========
F-120
FRANKLIN STREET PROPERTIES CORP.
NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
(n) The following information represents the historical revenues over
certain operating expenses for two properties from January 1, 2003
through the date of acquisition by a target REIT. Royal Ridge was
purchased January 30, 2003 by FSP Royal Ridge Corp. and Collins
Crossing was purchased March 3, 2003 by FSP Collins Crossing Corp.
For the Period
January 1, 2003 to January 1, 2003 to
(in thousands) January 29, 2003 March 2, 2003
Royal Ridge Collins Crossing Total
----------- ---------------- -----
Revenue:
Rental $ 1 $ 1,347 $ 1,348
---------- ---------- ----------
Total revenue 1 1,347 $ 1,348
---------- ---------- ----------
Expenses:
Rental operating expenses 95 320 415
Real estate taxes and insurance 19 156 175
---------- ---------- ----------
Total expenses 114 476 590
---------- ---------- ----------
Revenue over certain operating expenses $ (113) $ 871 $ 758
========== ========== ==========
(o) FSP Corp. is purchasing the real estate assets and a stated amount
of cash (the adjusted cash reserves) from each target REIT in
exchange for a fixed number of shares of FSP common stock. The final
dividend to the shareholders of the target REITs represents the
estimated fair value of the net assets not purchased by FSP Corp. as
of the date of the pro forma balance sheet. The estimated final
dividend as of the date of the pro forma balance sheet for the
target REITs is shown in the following table. The actual final
dividend will be based upon the fair market value of the net assets
not purchased as of the actual merger date.
Montague $1,065
Addison 2,058
Royal Ridge 1,569
Collins 1,329
-----------
Total $6,021
===========
(p) The cumulative unbilled straight-line rents of the target REITs will
be eliminated at acquisition.
(q) The cumulative deficit of the target REITs will be eliminated at
acquisition.
F-121
FRANKLIN STREET PROPERTIES CORP.
NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
(r) The following table combines the historical cash flows for the
target REITs for the nine months ended September 30, 2004.
(in thousands) Montague Addison Royal Collins Total
----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,861 $ 3,288 $ 941 $ 2,108 $ 8,198
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization expense 282 1,136 429 972 2,819
Amortization of favorable leases 872 -- 349 713 1,934
Changes in operating assets and liabilities:
Restricted cash -- 15 -- -- 15
Tenant rent receivables -- 24 -- (10) 14
Step rent receivable (69) (110) (86) (249) (514)
Prepaid expenses and other assets (8) (48) 5 (8) (59)
Accounts payable and accrued expenses 54 (361) 235 (204) (276)
Tenant security deposits -- (15) -- -- (15)
Payment of deferred leasing commissions -- (329) -- -- (329)
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 2,992 3,600 1,873 3,322 11,787
----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets and related leases, office
computers and furniture, capitalized merger costs -- (217) -- (8) (225)
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities -- (217) -- (8) (225)
----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to stockholders (2,953) (3,857) (1,614) (3,746) (12,170)
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (2,953) (3,857) (1,614) (3,746) (12,170)
----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 39 (474) 259 (432) (608)
Cash and cash equivalents, beginning of period 3,594 5,966 2,251 5,066 16,877
----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 3,633 $ 5,492 $ 2,510 $ 4,634 $ 16,269
==================================================================================================================================
F-122
FRANKLIN STREET PROPERTIES CORP.
NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
(s) The following table combines the historical cash flows for the
target REITs for the year ended December 31, 2003.
(in thousands) Montague Addison Royal Collins Total
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 2,669 $ 4,005 $ (958) $ (976) $ 4,740
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization expense 368 1,497 518 1,080 3,463
Amortization of above market lease 1,164 -- 426 791 2,381
Changes in operating assets and liabilities:
Restricted cash -- 9 (571) (115) (677)
Tenant rent receivables, net -- (25) -- (25) (50)
Straight-line rents, net (262) (322) (954) (279) (1,817)
Prepaid expenses and other assets, net 377 112 (1,051) (2,167) (2,729)
Accounts payable and accrued expenses 383 165 240 1,467 2,255
Tenant security deposits -- (9) -- 115 106
Payment of deferred leasing commissions -- (39) -- -- (39)
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 4,699 5,393 (2,350) (109) 7,633
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets and related leases, office
computers and furniture, capitalized merger costs (355) (25) (22,324) (45,657) (68,361)
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (355) (25) (22,324) (45,657) (68,361)
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock, net -- -- 27,277 51,100 78,377
Distributions to stockholders (3,714) (4,721) (1,389) (2,392) (12,216)
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (3,714) (4,721) 25,888 48,708 66,161
-----------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 630 647 1,214 2,942 5,433
Cash and cash equivalents, beginning of period 957 2,683 -- -- 3,640
-----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,587 $ 3,330 $ 1,214 $ 2,942 $ 9,073
=============================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ -- $ 1,731 $ 3,444 $ 5,175
Non-cash investing and financing activities:
Dividends declared but not paid $ 960 $ 1,265 $ 536 $ 1,331 $ 4,092
F-123
COMPARATIVE PER SHARE DATA
The following tables present on a per share basis:
(a) Basic and diluted net income book value, and dividends declared for
FSP Corp. and each of the target REITs on a historical basis.
(b) Consolidated pro forma basic and diluted net income per share, book
value per share and dividends per share for FSP Corp. This table shows the
effect of the mergers from the perspective of an owner of one share of FSP
common stock.
(c) Equivalent pro forma basic and diluted net income per share,
equivalent pro forma book value per share and equivalent pro forma dividends per
share for each of the target REITs. This table shows the effect of the mergers
from the perspective of an owner of one share of stock of a target REIT. The
consolidated pro forma data are multiplied by the number of shares of FSP common
stock issuable in exchange for each share of target stock, also known as the
exchange ratio, as shown in the following table:
Target REIT Exchange Ratio
----------- --------------
Addison 5,948.67
Collins Crossing 6,167.63
Montague 5,649.72
Royal Ridge 6,055.79
The pro forma financial data and equivalent pro forma data are unaudited
and are not necessarily indicative of the operating results that would have been
achieved had the mergers occurred as of the beginning of the period and should
not be construed as representative of future operations.
FSP Corp. calculates historical book value per share by dividing
stockholders' equity by the number of shares of common stock (or preferred
stock, in the case of the target REITs) outstanding at the end of each period.
FSP Corp. calculates consolidated pro forma net income per share data for
FSP Corp. as if the mergers occurred on January 1, 2003 and 2004 and resulted in
weighted average shares of 60,523,000 and 60,525,000 for the nine months ended
September 30, 2004 and for the year ended December 31, 2003, respectively.
FSP Corp. calculates consolidated pro forma book value per share data for
FSP Corp. as if the mergers occurred on September 30, 2004 and resulted in an
ending number of shares of 60,525,000.
FSP Corp. calculates consolidated pro forma dividends per share by adding
the total dividends declared by FSP Corp. plus dividends declared by the target
REITs and dividing this sum by 60,525,000 shares, as shown in the following
table:
F-124
Dividends Declared
For the Nine For the Year
Months Ended Ended
(in thousands) September 30, 2004 December 31, 2003
------------------------------------------------------------------------
FSP Corp. $ 46,152 $ 46,747
Addison Circle 2,592 5,137
Collins Crossing 2,414 3,350
Montague 1,993 3,771
Royal Ridge 1,078 1,911
----------------------------------
Total $ 54,229 $ 60,916
==================================
FSP Corp. calculates equivalent pro forma net income per share for each
target REIT by multiplying the consolidated pro forma net income per share by
the exchange ratio.
FSP Corp. calculates equivalent pro forma book value per share for each
target REIT by multiplying the consolidated pro forma book value per share by
the exchange ratio.
FSP Corp. calculates equivalent pro forma dividends per share for each
target REIT by multiplying the consolidated pro forma dividends per share by the
exchange ratio.
F-125
For the purposes of the consolidated pro forma net income per share and
book value per share data, FSP Corp.'s historical financial data have been
consolidated with the target REITs' financial data.
Franklin Street Properties
Comparative Per Share Data
As of and for the nine months ended
September 30, 2004
(unaudited)
Pro forma Pro forma
Historical Consolidated Equivalent
----------------------------------------
Net income (loss) per share
basic and diluted
FSP Corp. $ 0.68 $ 0.68 $ --
Montague 5,572 -- 3,842
Addison Circle 5,170 -- 4,045
Royal Ridge 3,166 -- 4,118
Collins Crossing 3,798 -- 4,194
Book value per share
FSP Corp. $ 10.17 $ 10.92 --
Montague 80,680 -- 61,695
Addison Circle 84,918 -- 64,959
Royal Ridge 81,536 -- 66,129
Collins Crossing 83,054 -- 67,351
Dividends declared per share
FSP Corp. $ 0.93 $ 0.90 --
Montague 5,967 -- 5,085
Addison Circle 4,077 -- 5,354
Royal Ridge 5,554 5,450
Collins Crossing 4,350 -- 5,551
F-126
Franklin Street Properties Corp.
Comparative Per Share Data
As of and for the year ended
December 31, 2003
(unaudited)
Pro forma Pro forma
Historical Consolidated Equivalent
----------------------------------------
Net income (loss) per share
basic and diluted
FSP Corp. $ 1.18 $ 0.83 $ --
Montague 7,991 -- 4,689
Addison Circle 6,297 -- 4,937
Royal Ridge (3,267) -- 5,026
Collins Crossing (2,431) -- 5,119
Book value per share
FSP Corp. $ 10.41 $ -- $ --
Montague 81,075 -- --
Addison Circle 83,824 -- --
Royal Ridge 81,997 -- --
Collins Crossing 83,605 -- --
Dividends declared per share
FSP Corp. $ 1.36 $ 1.01 $ --
Montague 11,290 -- 5,706
Addison Circle 8,077 -- 6,008
Royal Ridge 6,424 -- 6,116
Collins Crossing 6,036 -- 6,229
F-127
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: November 18, 2004 REGISTRANT
FRANKLIN STREET PROPERTIES CORP.
By: /s/ George J. Carter
--------------------------------------
George J. Carter
President and Chief Executive Officer